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Ten trillion dollar question - Rabobank

FXStreet (Guatemala) - Analysts at Rabobank explained that the Fed has concluded its asset purchase programme and poses the question…now what?

Key Quotes:

“In financial markets where liquidity has dominated fundamentals for most of the past few years, the Fed’s tapering tantrums have been a big deal. At regular episodes emerging market currencies and their economies have been sent spinning ever since Bernanke lifted the veil in May 2013, with the brunt of the prospect of a receding liquidity tide falling down on countries which were perceived to have been lagging in their structural forms”.

“Mission accomplished. Back to fundamentals then? Not so fast… The Fed may be talking tough now, but most of the FOMC members are still of a dovish inclination and the US economy isn’t exactly powering ahead. We see the timing for a first US rate hike in 2015Q4 at the earliest. More to the point, the Fed may be garnering the most attention, but there are other central banks out there”.

“Notably the BoJ doubled down just last week and significantly expanded its quantitative easing programme. Meanwhile the ECB is dabbling into quantitative easing with the purchase of covered bonds and ABS, and rumours flying of corporate bond purchases. It would appear only a matter of time before deflation fears trigger a “classic” asset purchase programme involving government bonds”.

“The combined balance sheet of the Fed, ECB, BoJ and BoE sits at just over USD 10 trillion at the moment. While the Fed makes up the lion share and its contribution will be under downward pressure, this is a gradual process, for which BoJ and BoE activism may more than make up in 2015. Global liquidity is likely to remain ample and will continue to distort relative prices. The cheque book may still trump the text book. Perhaps that’s comfortable from a near-term perspective. But the underlying costs for the global economy are mounting, in particular where these steps are used as a substitute for additional structural reforms”.

United Kingdom BRC Shop Price Index (MoM) declined to -1.9% in October from previous -1.8%

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