What’s with all the money: what the printing press is doing to the currency market during the crisis
As part of the crisis response measures in the US, the Federal Reserve cut the interest rate to nearly zero, and provided $2.3 trillion to support the economy. Other governments are not far behind, consistently throwing liquidity at the coronavirus crisis. Traders and investors should be ready for even more volatile international market, and support the strong.
The Federal Reserve System will meet on April 28rg and 29th for the first time since January to decide the country’s further monetary policy. Since March, the American money printing press has cut the interest rate to 0.25%, stimulated the bond purchasing, and eased the credit conditions.
At the same time, the ECB is planning to spend over 1 trillion euros on assets in 2020 alone, and experts expert the regulator to continue with the soft monetary policy and support the banks further.
Asian governments also keep the pace: Bank of Japan has lifted the restrictions on purchasing of government bonds, and announced plans to quadruple the purchases of corporate debt securities.
Bet on the strong
At the first glance it may seem that the printing press operating at full capacity will lead the dollar to hyperinflation. However, quantitative easing programs (QE) are conducted by other large and small economies of the world, each to the best of the available reserves. This means that it’s those who fall slower who will have growth.
The ubiquitous monetary easing, including interest rate cuts, liquidity injections to the financial market will put the national currencies of the most countries under pressure in the middle term. That’s why the dollar remains strong in relation to other currencies even as the Fed unprecedentedly increases the budget to the record $6.42 trillion. Partly this is because the printing press isn’t just churning out the money, it gives them to the government gradually, and only after the government provides $2 trillion worth of government bonds at an appealing rate.
When everything falls, the US dollar rate, as well as the rates of other strong national currencies, falls not that hard. This means that in Forex, the currencies of countries whose economies are weaker at the moment will continue to fall, while the dollar and, for example, yen will rise. Investors should consider the US dollar, Japanese yen and euro as defensive assets.
However, if you look at the charts of the classic currency pairs, you’ll see that the volatility has increased, even in the case of strong currencies. It’s getting more difficult to predict the direction of one or another currency in the short term.
Read the daily market analysis provided by Grand Capital experts to navigate the ever-changing market.
