26 Nov 2014
Fed rate hikes matter more than BOJ and ECB QE – Nomura
FXStreet (Barcelona) - The Research Team at Nomura believe that the US quantitative easing (QE) has had significant cross-border effects, particularly in higher-yielding EM countries, through large capital inflows, currency appreciation pressure, rapid credit growth and asset price inflation.
Key Quotes
“Over 2010-13, EM received close to half of all global flows and so many expect a sharp reversal when the Fed starts to hike rates, even if gradually. A counter view is that the combined global liquidity generated by increased BOJ QQE and the start of ECB QE next year will be very large, more than offsetting any negative impact on EM from Fed rate hikes.”
“However, even if the size of ECB/BOJ QE turns out to be bigger than that of the Fed, we doubt that: 1) these programs will be as effective, and 2) the spillover effects will be large enough to neutralise the cross-border impact of Fed rate hikes”
“QE and forward guidance can increase expectations that wider interest rate differentials will persist, causing other currencies to appreciate against the currency of the country conducting QE.”
“Given that the USD is the world‟s reserve currency, many EM currencies are closely tied to the USD (the HKD peg being an extreme example). This means that EM monetary policies are more closely correlated to US Fed monetary policy than ECB or BOJ monetary policy.”
“Alternatively, FX intervention to limit EM currency appreciation against USD can lead to a large build up of FX reserves, which, if not fully sterilised, can lead to money and credit booms.”
Key Quotes
“Over 2010-13, EM received close to half of all global flows and so many expect a sharp reversal when the Fed starts to hike rates, even if gradually. A counter view is that the combined global liquidity generated by increased BOJ QQE and the start of ECB QE next year will be very large, more than offsetting any negative impact on EM from Fed rate hikes.”
“However, even if the size of ECB/BOJ QE turns out to be bigger than that of the Fed, we doubt that: 1) these programs will be as effective, and 2) the spillover effects will be large enough to neutralise the cross-border impact of Fed rate hikes”
“QE and forward guidance can increase expectations that wider interest rate differentials will persist, causing other currencies to appreciate against the currency of the country conducting QE.”
“Given that the USD is the world‟s reserve currency, many EM currencies are closely tied to the USD (the HKD peg being an extreme example). This means that EM monetary policies are more closely correlated to US Fed monetary policy than ECB or BOJ monetary policy.”
“Alternatively, FX intervention to limit EM currency appreciation against USD can lead to a large build up of FX reserves, which, if not fully sterilised, can lead to money and credit booms.”