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Forex Flash: Investors taste the bitterness of monetary easing – UBS

FXstreet.com (Barcelona) - The Friday's payrolls numbers left much to be desired and equity markets responded accordingly, but FX markets once again showed signs of correlations fatigue. 'Risk-on, dollar on' was already on the wane, but given the disappointment in the US economics and rising fears of another synchronized global growth slowdown, the traditional 'risk-off, dollar on' move did not apply across the board either.

The USD/JPY continued to firm, while the GBP/USD and EUR/USD were the big winners. The price action is quite reminiscent of the effects of QE in its early stages, where people were simply looking for a debasement effect brought about by policy. According to Research Analyst Gareth Berry at UBS, “We suspect that this may yet be the case: markets can expect another dose of liquidity, but it might not be the Fed doing all the work – after all, the current pace of balance sheet expansion is comparable to prior rounds, and if anything can be inferred from the payrolls numbers, it's simply that the Fed is unlikely to step aside anytime soon.”

This time, we suspect liquidity growth is going to come from three other G5 central banks: the ECB, the BoE and mostly notably, the BoJ. Although policies in these countries are designed as esoteric solutions, they come at a time when the market is beginning to worry about the impact of stimulus withdrawal from the Fed. Investors will have to acknowledge that this is a double-edged sword: monetary expansion can help stabilize sentiment and generate the conditions for growth and investment; on the other hand, the resulting distortions are hard to ignore and will further delay the rebalancing needed in many parts of the world.

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