QE and USD
The rule of thumb is that Quantitative easing weakens a countries currency. QE increases the supply of a currency and therfore you are decreasing its value. QE is literally the printing of money. One of my colleagues over at Forex Source posted an excellent chart showing some of the impact of QE on the USD. You can see on this chart that QE weakens USD.
Where are we now with the USD?
Recently the Fed have announced the start of virtually unlimited QE. However, the USD has generally been strong on safe haven demand. The analysts over at Nordea markets had an excellent piece well worth reading in full:
The USD has once again proven to be KING in times of crisis, probably as most debt is still denominated in USDs, which means that USDs are sought after when liquidity tightens globally as has been the case due to the corona lockdowns.The Fed has now acted accordingly via USD swap lines to everyone and their mothers alongside QE in sizes never seen before. USD liquidity is sprayed at every single scarce corner of the market now. This is ultimately going to kill the USD momentum; it is just a matter of time in our opinion.USD could face a hit of >15% over the coming 12-24 months if the global economy gets out of the woods in the meanwhile
So, the basic playbook for the USD is as follows. If the COVID19 crisis gets worse - we see dollar bids. If it gets better then we see USD sellers as the impact of QE comes home to roost. This base case would make for some decent EURUSD longs once we move out of the woods. It would perhaps explain the growing number of EUR longs in the COT report with the highest levels since June 2018:
- EUR long 74K vs 61K long last week. Longs increased by 13k
- GBP long 5K vs 11K long last week. Longs trimmed by 6K
- JPY long 18K vs 24K long last week. Longs trimmed by 6K
- CHF long 5K vs 5K long last week. No change in the current week.
- AUD short 31k vs 25K short last week. Shorts increased by 6K
- NZD short 16K vs 16K short last week. No change in the current week.
- CAD short 22k vs 29K short last week. Shorts trimmed by 7K
