Courtesy of John Nyaradi
Will the Currency ETF Market Draw More Attention Now That QE2 is Done?
The “Oracle of DC”, not Delphi, has spoken. QE2 is now a done deal, if recent remarks by Bernanke are to be taken at face value, and since QE2 was so controversial, the Fed has no plans for a QE3 program any time soon, at least not in 2011. Much has been written over the past few months regarding the discontinuance of QE2 and the impact on our various trading markets after that stimulus was withdrawn. However, the present has arrived, and the unanswered question remains as to what now.
If we look at previous pricing behavior of the U.S. Dollar Index, as represented in the chart below, the greenback has been on a steady downward slide for months. Expanding the money supply translates into dilution of the Dollar on the global stage, an implied “tax” on exporters to our domestic shores if contracts were denominated in a foreign currency. This program drove the Dollar to a new sixteenth-month low in May, and most experts believe the Dollar can go no lower.
Since May, the forex market has produced a “bounce-back”, as signified by the two Green “channel” lines. Currency specialists, respected for their accuracy in the past, recently predicted that the Dollar will not strengthen to a large degree after QE2 due to the seeming gridlock on Capitol Hill to deal with the debt ceiling and related deficit management issues. Their estimates for the future are more about maintaining weakness, while the market continues its present sideways ranging motion for the balance of the year.
What should investors make of all of this? For those that have not chosen from the many forex brokers in the market, the currency ETF market can support any forex investing strategy going forward. Whether one elects to invest in a commodity currency like the “NZD USD” pair or seek the security of the Swiss Franc, there is an ETF option to suit your needs. QE2 has increased the attention for potential short-term gains in our currency markets, and there are several ways to participate after a strategy is set.
A prudent strategy should address four fundamental influences in the forex market. First is the Fed. Most observers have noted that the Fed will maintain its balance sheet position for the remainder of the year. As Treasuries mature, new issues will be sold to fund the shortfall. Demand remains high in recent auctions. No other asset sales are likely, considering the pressure on the Fed to resist monetary tightening. Inflation is below its 2% target, allowing interest rates to remain at 0.25% or lower.
Europe deficit and potential debt default issues remain the one buffeting force for the Dollar. The Greek Parliament did adopt austerity measures, but a major rollover of debt in August will be the next “three act tragedy” to hit the stage in Athens. The “Oracle of Delphi” is speechless at present, but the remaining “PIIGS” must also act upon this stage, and the finale is still in doubt.
Will the Greenback continue to be the safe-haven of choice for risk-averse investors? Some experts believe that a “divorce” is in progress, with suitors leaning towards the Yen and Swiss Franc for safety when ill winds blow across the globe. Other high-interest markets are now more favorable than the Dollar from a pure return perspective, especially the commodity currencies.
Lastly, economic data releases will provide the best guidance going forward. Ranging fluctuations may be the order of the day, but there are opportunities in near-term volatility for those willing to take the risk.
“Oracle Ben” Has Spoken Again (NZD, USD, JPY, CHF) courtesy of Forex Traders.
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