Forex Flash: A possible paradigm shift in the USD - HSBC

Share | (Barcelona) - Poor global data recently has been 'risk off' and therefore positive for the USD, but QE3 impact on financial assets is 'risk on' and negative for the USD - thus, "this is creating a USD standoff" says David Bloom, Head of Research at HSBC.

It also creates a rather "perverse dynamic" the analyst adds, "whereby US data disappointments provoke a 'risk off' USD positive reaction, but substantial disappointments foster a 'risk on' mood as the markets anticipates a strong policy response - a USD negative reaction." Under HSBC Bloom's view, "the extent to which it can capitalise on the sequence of weaker data is limited."

This is not sustainable as additional policy easing all it does is to delay the day of reckoning, says Mr. Bloom. "If asset prices have risen simply because a fresh buyer has entered the market rather than because underlying fundamentals have improved, the gap will have to be closed at some point."

David final research touches on what he sees as a possible paradigm shift on the play of quantity of money increasing while the prospects for growth are decreasing.

Mr. Bloom: "One is good for the USD, the other bad. The risk for the USD is that we are on the cusp of a paradigm shift for the FX market where the offsetting influences of weak economics and the QE response no longer hold sway. Instead, we are set to look at the USD not in terms of its "function" as a high liquidity currency but in terms of its value. This is a shift that is likely to push the USD lower."

The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of The NASDAQ OMX Group, Inc.

This article appears in: Investing , Forex and Currencies

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