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Stewart Cowley: the extraction of wisdom

by Stewart Cowley on Apr 14, 2014 at 14:30

Unfathomable currency movements

Because, at that moment, the game that we all knew was going on, was given away. Unfathomable currency movements can be rationalised like this;

• If you indulge in QE your currency will be punished

• If you indulge in QE all financial assets will rise, almost indiscriminately

Using these rules you can understand why the US dollar and yen have fallen, the euro has risen (despite all the problems within Europe) and why sterling began to appreciate the moment Mark Carney turned up at the Bank of England last summer and ended the process of QE for the UK.

Changes in market dynamics

What is also interesting is the timing of a European-style QE process – it will happen (for surely it will) precisely at the moment when the US is ending theirs. This could give rise to some very interesting changes in market perceptions and dynamics;

• The euro could fall against a basket of currencies (especially the US dollar and sterling)

• European financial assets will rise sending stock markets higher, government bond yields lower and corporate bond spreads tighter almost indiscriminately

• The European and US financial cycles decouple for the first time in many years

• Previously unloved emerging market currencies become the beneficiaries of money flows out of the Eurozone

Arguably, some of these new trends are already in place - you only have to look at corporate bond yield spread declines in Europe - whilst some emerging market currencies are beginning to appreciate again.

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