The impact of Quantitative Easing on the USD

Giles Coghlan LLB, Lth, MA Financial Source

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. You can see on the below 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.

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

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Author

Giles Coghlan LLB, Lth, MA

Financial Source

Giles is the chief market analyst for Financial Source. His goal is to help you find simple, high-conviction fundamental trade opportunities. He has regular media presentations being featured in National and International Press.

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