Thursday, 30 January 2014

How has FED tapering affected exchange rates?

Thursday 30th January 2014 
There has been some key volatility in exchange rates this week, being mainly driven by events in the USA. In today’s report I’m going to explain how the FED tapering has pushed some exchange rates higher such as the Pound against emerging economies such as Turkey, New Zealand & South Africa, and some exchange rates lower for example Pound/US Dollar. 

FED cut stimulus as expected 

Last night the US Federal Reserve announced a $10bn reduction in its monthly bond purchases from $75bn to $65bn. This is the second month in a row they have done so. 

The central bank had been buying bonds in an effort to keep interest rates low and stimulate growth, and now they are winding that in is a sign of positivity for the US economy. 

So how has this affected exchange rates? 

Pound/Dollar rates have fallen. This is because the news is good for the USA, and so the Dollar has strengthened and become more expensive to buy. It’s dropped from 1.66 to 1.65, not a huge drop because the move was expected. 

Of more interest was the effect on currencies in emerging markets. Investors have been selling riskier higher yielding currencies like the South African Rand (ZAR), New Zealand Dollar (NZD), Australian Dollar (AUD) and Turkish Lira (TRY). The reason is there are fears their economies may now suffer as the reduction in liquidity from the FED takes effect. Read more about this in detail here on the Telegraph site.

This means these currencies are very cheap to buy, and we’re seeing some of the highest exchange rates for these currencies for some time. Some of the countries have started to raise their interest rates to try and stop the capital flow out of the country as outlined in the link to the Telegraph above. 

Some analysts said that while the Fed may not have explicitly mentioned emerging markets in its statement, it would be an oversight to think the central bank is not keeping a close eye on the global economy. "The FOMC will want to observe the domestic and international market reaction to today's tapering decision," said Jefferies chief US economist Ward McCarthy. 

There are some great exchange rates available for AUD, NZD, ZAR, TRY among others. If you need to purchase these currencies in the short to medium term, you can get in touch with me to find out more about the exchange rates I can offer by clicking here. 

Pound/Euro remains stable between €1.21 & €1.22

Closer to home, we have seen the GBP/EUR rate fluctuate a little, but today has risen from €1.21 to €1.2160. There was some poor data from Germany that has weakened the Euro a little this morning. 

I don’t expect any significant gains in the GBP/EUR rate in the short term, mainly because the Bank of England has recently made it clear interest rates will not be rising any time soon. 

The rate is still very close to the best in 12 months, so if you need to buy Euros and want to take advantage of the current levels, click here to send me a free no obligation enquiry.