Yesterday we noted Bill Gross’ latest comment that the dollar could go into another 20% tailspin post-QE in contravention to this idea that QE is all priced in, and thus set to reverse.
Citi strategist Steve Englander is also warning that QE won’t mark the end of the decline:
The debate on QE2 appears to have narrowed. Investors are debating whether the initial commitment will be more or less than the roughly USD500bn that is expected, how open the door will be to expanding the program further, and how tight the conditionality will be with respect to monetary policy targets. (These expectations are consistent with the second survey on QE conducted by our FI strategists, although we think that there may have been some pullback after the recent run of strong data.) Secondarily they are debating whether the FOMC whether there might be a change in the target of monetary policy and how the number of dissents is likely to evolve.
This might suggest that the room to surprise FX investors is limited and that the potential impact on FX is already priced in. We think that there is further USD negative potential beyond what is priced in. If the Fed is targeting asset prices in this round of QE2, the same incentives that apply to the buying of domestic assets will also apply to the buying of foreign assets. Unless the asset price effects are fully priced in, the USD effects are not fully priced in either. Secondarily we think that the combination of QE2, low rates, risk-on and rising US external imbalance will weigh heavily on the USD. Finally we think that QE2 sends a negative signal to foreign official investors who already see themselves as heavily overweight USD.
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