QE Back in Focus Renders Rally of Euro and Yen Short-Lived

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  • More stimulus ``will help stabilize global asset prices''
  • Nomura sees MAS widening the policy band at October meeting

The possibility of further quantitative easing in Europe and Japan has returned to investors’ radar screens, reining in this week’s rallies in the euro and yen.

UBS Group AG, the world’s largest private bank, is advising its wealthy clients to sell the euro, saying a worsening inflation outlook has increased the risk of further quantitative easing in Europe, James Purcell, Hong Kong-based cross asset strategist at the bank’s wealth management business, said in an interview Thursday. The bank also urged clients to sell the yen as the tumble in oil prices may prompt the Bank of Japan to boost monetary stimulus, he said.

The euro and yen surged to seven-month highs against the dollar on Monday as the global market rout, triggered by China’s surprise currency devaluation, reduced the chances the Federal Reserve will increase its benchmark rate next month. China’s central bank cut lending rates Tuesday, and policy makers in other countries are set to follow, according to Greg Gibbs, director of Amplifying Global FX Capital.

“After the pushback on the U.S. rate hikes, the market is refocusing on the prospect of more QE, more global policy easing basically -- in China and in other countries -- that will help stabilize global asset prices and improve the global economic outlook,” Gibbs said in an interview in Singapore.

The euro fell for a third day after European Central Bank Executive Board member Peter Praet said Wednesday the ECB was willing to expand its asset-buying program as a slump in commodity prices and risks to global economic growth threaten its inflation goal. The common currency had climbed to a seven-month of $1.1714 on Aug. 24 as a slump in stocks around the world boosted demand for the currency as a haven.

Extending QE

“Maybe they’ll end up extending their QE potentially or even increasing their monthly purchasing response,” UBS’s Purcell said. “‘We probably put it as a minority risk, rather than a base case.”

The single currency is set to weaken to $1.05 in three months, Purcell said. The euro last traded at $1.05 on March 16, the same day it dropped to the lowest level since January 2003.

Gibbs, a former strategist at Royal Bank of Scotland Group Plc, is bearish too, predicting that the euro may drop more than 10 cents from now to reach parity with the greenback next year.

“If the euro was to stay around $1.15, you’ll probably see its economy slow down, the inflation situation will deteriorate.,” said Gibbs, a former strategist at Royal Bank of Scotland Group Plc. “The market will then start to factor in more QE activity.”

The yen extended a two-day decline after BOJ Governor Haruhiko Kuroda said the central bank has “many options” should it need to bolster easing as he monitors risks from volatility in global financial markets. The currency will likely slide to 127 against the dollar in three months, he said.

“The activity from Chinese depreciation probably has a greater effect on Japan than many other economies in the world due to the competition for certain segments of export markets,” said UBS’s Purcell.

Japan’s currency tumbled 0.3 percent to 120.31 per dollar as of 11:05 a.m. in London. It’s shed 1.6 percent since Monday when it touched 116.18, the strongest since Jan. 16.

‘Sustained Moves’

“Sustained moves below 120 could bring more QE or policy actions by the BOJ over a six-month time frame,” Gibbs said. “Dollar-yen could go up to 122, 123 in a calmer scenario.”

Expectations of further policy easing aren’t confined to the ECB and BOJ. The Monetary Authority of Singapore is likely to widen its policy band at its next scheduled meeting in October because of slowing growth, a low inflation rate and the global market rout, Nomura Holdings Inc. analysts including Craig Chan, the head of Asia ex-Japan foreign-exchange strategy, wrote in a research report dated Aug. 26. The MAS guides the Singapore dollar against an undisclosed currency basket and adjusts the pace of appreciation or depreciation by changing the slope, width and center of a band.