QE2: Asia Currency Wars and Macro Investment Implications

Oct. 1.10 | About: CurrencyShares Canadian (FXC)

The Fed sent out some white smoke in its meeting the other week in preparation of Quantitative Easing Part 2 [QE2] for its November meeting. This essentially means risk based assets have a bit of a bid under them as the Fed tries to reinflate risk based assets and lending.
A lot of the discussion on this topic has been confined to potential economic futility of the move and concerns that the Fed is reading too much into its mandate. I think the most interesting part of this strategy by the Fed is how it contrasts with the various currency intervention efforts around the world, particularly those in Asia.
Japan and China are both using export strategies to steer economic policy, and a big part of that is large scale currency intervention. Currency intervention is already particularly difficult for the Chinese since it can potentially stoke severe inflation outbursts.
What will the impact of QE2 be on the ability of China, Japan and others to keep their currencies low? How does the Fed structure any intervention while constructing a policy that encourages lending by banks?
The investment implications of this are clear:
  • On the currency side, the Canadian dollar-- backed by output in oil and other raw materials as well as rising interest rates-- looks compelling.
  • Generally risky assets look a lot more interesting, particularly if hedged against a currency that is not currently being inflated.

Disclosure: No positions