* QE 2.0 is really starting to course through the market’s veins now. USD is well and truly sunk as speculation intensifies around the November 2-3 FOMC and GBP deserves to be close behind. GBP is a mini-me to the USD as the BoE, or at least the US faction on the MPC Adam Posen, tries to out-Fed the Fed (arguing in a speech today that purchases of private sector assets should be the next line of attack should purchases of Gilts prove inadequate). This really does have the makings of a race to the bottom in monetary policy, which will almost inevitably result in a further round of de facto competitive currency devaluations (Brazilian President Lula was perhaps not wide of the mark in criticising such policies this week). Competitive QE will not be a pretty thing, unless of course you happen to own gold.
* And my two cents worth is that the much-maligned ECB will come into its own as other major CBs more actively pursue policies that not unreasonable people will argue will lead to instability. The standing of the innately more conservative ECB will surely rise as that of the Fed and BoE’s sinks (the BoE’s credibility is more at risk than the Fed’s given the UK’S singularly bad inflation performance). In turn the market could well find itself, much against its better judgement, coming to like the euro for itself. The last year was all about fiscal policy. The next year threatens to be all about central banks and the relative risks they are prepared to run with their credibility.
* Vitually all central banks have participated in a bold experiment in monetary policy since 2007. But having collectively pushed the boundaries of monetary policy, the central bank world is dividing between those that recognise limits to what a central bank can achieve and those that do not. Put another way, some central banks believe they can only set the price level whilst others believe they can generate growth. Three years on from the onset of the recession and this philosophical divide is starting to come into starker relief, and monetary paths consequently starting to diverge.
* The FX strategy for this more divergent world is relatively straightforward. Sell the currencies of those central banks that target higher inflation and push the boundaries of monetary policy most aggressively – USD and GBP are the front-runners here, especially as the UK is in the unusual position of delivering persistently high inflation while the BoE busies itself to fight deflation. On the other side, buy currencies of central banks that eschew such radicalism, either because their economies are strong enough to warrant policy tightening (AUD) or because the central bank disagrees with the growth at all cost philosophy of the activists.(most European currencies, excluding GBP of course).
from Paul Meggyesi, Global FX Strategy, JP Morgan London
