A speech by Federal Reserve Chairman Ben Bernanke on Tuesday implied more asset purchases were coming under the Fed’s QE policy, Richard Cochinos, a foreign exchange strategist at Bank of America Merrill Lynch, said on Wednesday.
Cochinos expects asset purchases to be extended in December to at least $45 billion Treasury purchases per month. In September, the Fed announced purchases of mortgage-backed securities under its QE3 policy.
In a speech to the Economic Club in New York on Tuesday, Bernanke stopped short of promising more monetary easing but still the market expects more efforts before the year end.
“Our conclusion is USD selling should increase with confirmation of greater QE, tempered by the fiscal cliff,” Cochinos wrote in a report.
Analysts from HSBC said in a recent report that the arrival of QE had created an unclear picture of the foreign exchange market.
Under QE3, selling of dollars is similar in size as what happened during the first round of quantitative easing, which took place between December 2008 and March 2010, and less than half the USD outflows that happened during QE2 – between November 2010 and June 2011.
“However, if QE3 is extended next month as we expect, this would place the balance-sheet expansion on par with amounts seen under QE2,” he said. “Directionally, USD selling is still headed primarily to emerging markets,” he said, adding that still the volume of dollar-selling may be “less than normal” as long as there is uncertainty over the fiscal cliff.
Bond managers are comfortable investing in Latin America, while Asia has captured the bulk of QE inflows for foreign exchange and equities, “offering poor risk/reward,” said Cochinos.
The Bank of America Merrill Lynch strategists are bullish on the Mexican peso (MXN), recommending long exposure against the Canadian dollar (CAD) and the Chilean peso (CLP).