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The Federal Reserve Tapered,What That Means To Forex

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time is money

time is money

"If money doesn't loosen up, this sucker will go down."

-President Bush in September 2008 on US Economy

 If you're new to the Forex market, it's important to know that when you trade Forex, you're trading the effects of economic global development. As you likely know, in 2008, there were fears that global economy would come to a screeching. I worked on the sales desk of a brokerage covering the overnight shift and I remember feeling like 24-hour news wasn't enough. Every day, it seemed like a new institution that was synonymous with Wall Street or Global Financial markets were going out of business because they had leveraged their portfolios 40x on a bunch of bad trades that when south fast.

Pushed To The Brink & Then What?

Those scary events were 5-years ago and in December of 2008, The Federal Reserve embarked on their first attempt of Quantitative Easing know known as QE1.

Quantitative Easing is an exercise by the central bank whereby they buy up debt like treasuries in order to boost the economy which loosens money up ideally allows it to flow through the economy again. Many free market lovers who think markets should work through their problems on their own call this money printing where as others who don't want another Great Depression feel the Fed should do whatever it takes. 

Where Did The Money Go?

Of course for every action, there is an opposite or equal reaction and one of the key effects in the Forex market was a quick and painful death to the Carry Trade.  The reason for this abrupt death was that many central banks like the Bank of England along with the United States and other G10 currencies, dropped their interest rates as low as possible in order to boost domestic demand but by doing this, foreign buyers would not look to these economies as attractive investing opportunities unless they were simply looking for a safe place to put their capital as the global economy got out of this depressed growth environment which were now beginning to see 5 years after the fact.

QE took off in the United States only to be followed by major economies like Japan which had institutions and money managers looking elsewhere for a return on capital. This search high and low caused many people to look at Emerging Markets like China which had a 7-8% GDP while other Developed Markets had negative GDP which quickly diminished demand for that countries debt and thereby currency.

The Fed Tapered, Now What?

On Wednesday, December 18th, Ben Bernanke hosted his last Federal Open Market Committee meeting after deciding to Taper or pull back on their latest QE efforts which immediately boosted the US DOLLAR and the DXY (US Dollar Index).

The logic behind the demand for the USDOLLAR on the Taper announcement was simply that the Taper has come because the US Economy is growing (recent GDP reading was 4.1% in Q3 2013) to a point that the support that QE provided was no longer needed as the economic engine in the United States is beginning to run again as it was intended. 

As the Taper of QE gathers pace in 2014 and if economic data points like GDP and employment continue to surprise to the upside, then Ben Bernanke and the Federal Reserve will look like the hero's that few though they would they originally engaged in QE as the US Dollar and US equity markets remain steady and strong. 

Have a Happy Holidays & we look forward to trading with you in 2014!

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