The "End Of QE2" Trade | Forex Factory

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The "End Of QE2" Trade

  • #1
  • First Post: Mar 5, 2011 11:56am Mar 5, 2011 11:56am
I have been thinking about this for some time as I watch the USD drop across the board. The end of QE1 brought about some seismic shifts in financial markets in 2010, with the Dollar skyrocketing last summer after QE1 ended and the Euro Debt crisis began.

I would like to use this thread to exchange ideas on how all financial markets, specifically forex, will respond to the ending of QE2 which is scheduled to end June 30th 2011.

Personally, I think that the end of QE2 will eventually cause the Dollar to rise and US stocks to fall sharply if another European debt crisis occurs. All the chatter lately about the Dollar losing its reserve currency sounds like exactly like the type of stuff we heard last summer to the tune of "The Euro will collapse before the end of the year"

The types of statements are normally a sign to fade the trend. While the situation in the USA is serious, I dont believe there is ANY alternative currency even close to supplanting the dollar...Therefore if another crisis strikes AFTER QE2 I think the Dollar may be in for a huge rally.

I would love to hear your point of view.

Happy Trading
Twitter: @TrendersGame
  • #2
  • Mar 5, 2011 2:17pm Mar 5, 2011 2:17pm
For the foreseeable future, there will not be much incentive to hold the Dollar. Right now investors would be paying to hold it, not getting paid. In this situation, investors would be pinning their prospects of a profit on rate change alone less the interest differential. With gold making new highs again, unemployment still high, and Europe talking strongly in regards to a rate hike as early as next month I'd say the dollar will continue to lose value for the time being. If I had a substantial amount of money I needed to safe guard, I'd avoid the dollar for now. There are rumors floating around of yet another round of quantitative easing, it's only rumor, but money is flowing into the Euro right now, and investors are being compensated for their flows, even if it's just a little bit.

I have faith in the American system on a fundamental level. There will come a day when it's time to buy the dollar again, America will pull out of it's current nose dive.

As the value of the Dollar falls, the better the future trades will be. Right now, the only thing the dollar has going for it is cheaper and cheaper prices, investors will have no problem paying interest to hold the dollar if the price is low enough because we all know that rates can't stay as low as they are forever. Betting on the USA is a solid bet, but the price has to be right in this current environment.
  • #3
  • Mar 5, 2011 3:29pm Mar 5, 2011 3:29pm
I'm just waiting to see how stuff will evolve in the next week or two taking into account the arab world protests
  • #4
  • Mar 5, 2011 3:50pm Mar 5, 2011 3:50pm
Every time i buy/sell thinking i've got a turning point in the market i find to my misfortune that it isn't. So it would be safe to say the euro,pound,swiss,yen etc are going to go higher before they go lower. I think the dramatic shift will actually come once USA starts the rate raising cycle rather then the end of qeII. Also the sentiment that $ strength came from ending of qeI is misplaced.
I am usually Wrong
  • #5
  • Mar 5, 2011 6:26pm Mar 5, 2011 6:26pm
Quoting Scotty B
For the foreseeable future, there will not be much incentive to hold the Dollar. Right now investors would be paying to hold it, not getting paid. In this situation, investors would be pinning their prospects of a profit on rate change alone less the interest differential. With gold making new highs again, unemployment still high, and Europe talking strongly in regards to a rate hike as early as next month I'd say the dollar will continue to lose value for the time being. If I had a substantial amount of money I needed to safe guard, I'd avoid the...
Well said. Completely agree, and I, too, am from corn country.
  • #6
  • Mar 5, 2011 8:49pm Mar 5, 2011 8:49pm
Quoting GEfx
Well said. Completely agree, and I, too, am from corn country.
Oh yeah, what part of the corn country are you in? I'm in Lincoln, NE.
  • #7
  • Mar 5, 2011 8:57pm Mar 5, 2011 8:57pm
QE3 is on standby and QE4 is lined up if needed.

Lots of talk about the Dollar no longer being the world reserve currency (countries are already positioning themselves away from the dollar), that will be a big change.
Don't wish it were easier, wish you were better. ~ Jim Rohn
  • #8
  • Mar 5, 2011 11:15pm Mar 5, 2011 11:15pm
Quoting LasVahGoose
QE3 is on standby and QE4 is lined up if needed.

Lots of talk about the Dollar no longer being the world reserve currency (countries are already positioning themselves away from the dollar), that will be a big change.
Good to "see" you round these parts, man. I hope everything is going well.
  • #9
  • Mar 6, 2011 12:38am Mar 6, 2011 12:38am
Quoting Scotty B
Good to "see" you round these parts, man. I hope everything is going well.
Thank you. Just trying to stay sane in an insane world. Haha! Hope all is well with you too!
Don't wish it were easier, wish you were better. ~ Jim Rohn
  • #10
  • Mar 7, 2011 12:24pm Mar 7, 2011 12:24pm
There are several interesting things developing. I am mainly looking at in what TF middle east crisis could resolve, QE2 end, ECB and BoE will increase rates.

Mid East is unpredictable as it could get solve in a month or take longer. But ECB and BoE rate hikes are pretty much priced in. There is still strong buying in EU as rating downgrades had no effect on it in last couple days.

As far as QE2 is concerned i think USD will move up before they announce to end QE2 and herd will be hundreds of pips late in the party. But for that to happen we need consistently good data for next months regarding Inflation and growth (triggering higher yields) in USA, than a very healthy NFP number and and u never know when PIIGS could pop up again.

Its early to make fundy assessments but technically UJ, UCHF, GU, Ucad, AU have stopped making new high's leaving USD and GOLD alone.
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  • #11
  • Mar 7, 2011 6:09pm Mar 7, 2011 6:09pm
Quoting nasir.khan
There are several interesting things developing. I am mainly looking at in what TF middle east crisis could resolve, QE2 end, ECB and BoE will increase rates.

Mid East is unpredictable as it could get solve in a month or take longer. But ECB and BoE rate hikes are pretty much priced in. There is still strong buying in EU as rating downgrades had no effect on it in last couple days.

As far as QE2 is concerned i think USD will move up before they announce to end QE2 and herd will be hundreds of pips late in the party. But for that to happen we need...
Good analysis. Despite the fact that event traders have priced in the chance of a rate hike in EU, long term traders are also building positions to carry. If EU does increase rates, money will will begin flowing into EU for the rate differential + RELATIVE safety over the dollar. The dollar will become even more expensive to hold, and EU, if they can convince investors that they have their debt problems under control, we will see Goldman's prediction of 1.5 within a year. Instead of the dollar bull's rate change less interest, Euro bulls will receive rate change PLUS interest.

To summarize, Euro's movement within the next year hinges on:

 

  1. EU debt crisis action plan or lack thereof
  2. An EU rate hike

If EU can clear these hurdles and the US retains a loose economic policy for any extended period of time, EU will only keep rising. I'm repeating myself now, but when the rumors begin flying of the US tightening their policies, then it will be time to cash out the EU carries and SELL GOLD!!!

Alright, I'll shutup now. Again, good post, Nasir.

  • #12
  • Mar 7, 2011 6:50pm Mar 7, 2011 6:50pm
There will be so much political pressure to even think about QE3, with government cutting spending and all. I don't think the end QE2 is priced in yet, but given NFP last week and if tensions in North Africa/Middle East subsides. We may be developing a base for USD right here..

But Oil definitely is the joker in the deck..
  • #13
  • Mar 8, 2011 1:34am Mar 8, 2011 1:34am
Quoting Scotty B
The dollar will become even more expensive to hold, and EU, if they can convince investors that they have their debt problems under control, we will see Goldman's prediction of 1.5 within a year. Instead of the dollar bull's rate change less interest, Euro bulls will receive rate change PLUS interest.
I think markets move way faster. Depending on the things you've mentioined (mainly the absense of more major EMU skeletons coming out of the closet), I believe we could see 1.5 before the summer holidays.
The nail that sticks out gets hammered back in
  • #14
  • Mar 8, 2011 12:58pm Mar 8, 2011 12:58pm
Quoting Scotty B
Good analysis. Despite the fact that event traders have priced in the chance of a rate hike in EU,...
Thanks.

I never take rate differential into consideration when ever i am thinking about fundies.Yeah it could play a role when we are in times of peace and growing world economies with smoothly moving markets. But when u have a Mid-East crisis, Economies struggling to find their way out of recessions and a sword of PIIGS hanging near head of EURUSD i wont care much about 1% rate differential. (Portuguese 10-year bond yields are above 7% for 23 days now and Greece and Ireland were bailed out soon after the same thing happened to them,anyway have to see what happens on Euro summit)

But i can see a scenario developing around what u have said.

The more i think about it more its gets clear that USD is in a loss/loss situation.

In times of Geographical unrest like Middle-East money flows into CHF, GOLD and JPY first. USD is the last choice as we can see looking on the charts of UJ and UCHF and cause of recent talks of rate hikes it cant also perform against EUR and GBP. Than we are left with NU, UCAD and AU and i dont have to say more about it (though u can argue USD's performance against Kiwi but we know it has more to do with Kiwi's weakness than USD's might) . So buying USD is a big no no in a risk-aversion triggering event that take's the price of oil up and potentially slows the Eco-growth.

On the other hand if middle east gets solved, PIIGS keep quit and as you have said could convince people that things are under control, Rate hikes from ECB and BoE, Good and sometimes disappointing numbers from US. But not a big signal of growth picking up speed keeping the QE2 ending talks low on the other hand not letting fear triggering among investors with good numbers too. In this scenario UJ and UCHF may could go up but most like will chop around until say June,.. but this will clearly signal decent bullish trends in GU and EU until Fed's end QE2 and start hinting about rate hikes, or guess what...........................PIIGS.

Now its my turn to shutup. ;P
  • #15
  • Mar 8, 2011 9:22pm Mar 8, 2011 9:22pm
Quoting nasir.khan
Thanks.

But when u have a Mid-East crisis, Economies struggling to find their way out of recessions and a sword of PIIGS hanging near head of EURUSD i wont care much about 1% rate differential.
You are aware that the 1% rate differential can be magnified through the use of leverage right?

Not only will it provide a safe source of income for speculators, but in unison, as Scotty (I cannot bring myself to call him Jim for some reason) eluded, they will also benefit from captial appreciation on their built up positions as time passes and more real money flows into EUR/USD.

The importance of IRD simply cannot be overemphasised...

I also can't help but think that the recent downmove in the EUR/USD, which may be attributable to the peripheral debt situation is creating somewhat of a healthy opportunity for long-term speculators to get in on the action at a juicy price. I'm of the opinion that the market is focusing on the wrong news currently, and next month the rekindled interest in interest rates (pardon the pun) along with real money flows entering the EUR/USD should propel us back above 1.40, but to where next? That depends on the sovereign debt situation...

This all reminds me of interlocking pieces of a puzzle..weird analogy I know.

Now it's my turn to shut up.

Regards,
xXTrizzleXx
  • #16
  • Mar 9, 2011 12:13pm Mar 9, 2011 12:13pm
Quote
You are aware that the 1% rate differential can be magnified through the use of leverage right?

Not only will it provide a safe source of income for speculators, but in unison, as Scotty (I cannot bring myself to call him Jim for some reason) eluded, they will also benefit from captial appreciation on their built up positions as time passes and more real money flows into EUR/USD.

The importance of IRD simply cannot be overemphasised...
yeah i know,
So if my calcs are right that would be 12$ per day with 1 pip = 100$ after the rate hike. So a 50 pip move against u would wipe out IRD profits of holding your position for 1 year.

Bulls make money, Bears make money and piigs get slaughtered.

All i want to say is that there is nothing wrong having a positive IRD on your side but it should not be a reason of taking a trade in the given the underlying risk associated with the pair.

Quote
I also can't help but think that the recent downmove in the EUR/USD, which may be attributable to the peripheral debt situation is creating somewhat of a healthy opportunity for long-term speculators to get in on the action at a juicy price. I'm of the opinion that the market is focusing on the wrong news currently, and next month the rekindled interest in interest rates (pardon the pun) along with real money flows entering the EUR/USD should propel us back above 1.40, but to where next? That depends on the sovereign debt situation...

Yeah that's an excellent observation totally agree here.
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  • #17
  • Mar 9, 2011 3:19pm Mar 9, 2011 3:19pm
http://www.reuters.com/article/2011/...7285M020110309
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  • #18
  • Last Post: Mar 9, 2011 7:05pm Mar 9, 2011 7:05pm
Quoting xXTrizzleXx
...but to where next? That depends on the sovereign debt situation...

That's the beauty when it comes to "value" in the marketplace. I believe the rate will rise until a better option comes along. Say for example that it takes 3 more years for the US to really start showing strong signs of recovery. Even if Euro made it up to 1.60 or beyond, if the IRD remained the same or even widened further with later hikes in Europe, investors will continue buying Euro. There will not be a some specific price where everyone says oh, the Euro is too expensive now, I'm going to pick up the bill and pay 1+% per day to sell it down. Sure, you'll get groups of investors that liquidate positions that are in profit, but in my opinion, the buy side of the market will make sense until someone else offers investors a better, equally safe bang for their buck. I believe the Dollar is that better trade, but who knows when that opportunity will open up?

I think orderflow can be that dirt simple. Instead of trying to guess specifically where the market is going, ask what trade gives investors sustained value over time. I believe the dips we've seen recently in the Euro were profit taking on very old open interest, not necessarily lots of new sellers. If it is lots of short term sells pushing the market down quickly, you are right, long term traders will arbitrage the market.

One more thing, it's not even the fact that the interest rate is only ~1%, it's the fact that the Euro is the next best choice over the dollar, and it's paying SOMETHING. Money will FLOW into it because it PAYS, plus the rate change of course. It's just common freaking sense to me.
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