QUANTITATIVE EASING AND ITS IMPLICATIONS

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QUANTITATIVE EASING AND ITS IMPLICATIONS

  1. 1. Is Quantitative Easing BeneficialIs Quantitative Easing Beneficial To Global Economy ?To Global Economy ? PRESENTED BY: VEENA MOHANDAS (Test Engineer at BNP PARIBAS)
  2. 2. What is Quantitative Easing ?What is Quantitative Easing ? Unconventional monetary policy used by some central banks to stimulate their economy. The central bank creates money which it uses to buy government bonds and other financial assets, in order to increase the money supply and the excess reserves of the banking system
  3. 3. How does QE work?How does QE work? The term quantitative easing (QE) describes a form of monetary policy used by central banks to increase the supply of money in an economy when the central bank interest either at, or close to, zero. Fed supplies money to banks Banks supplies specified bond instruments In QE US Fed would buy the designated bonds from the US banks in exchange for cash US Dollars
  4. 4. Fed supplies money to banks Banks supplies designated bond instruments Banks lend the funds to consumers and business QE is intended to improve the flow of credit in the economy by flushing the banking system with funds
  5. 5. Effect on US DollarEffect on US Dollar Excessive $ in the economy Flight of $ in the emerging market Devaluation of $ Purchase of Treasury Bonds Leads to Inflation  For better returns  Interest rate hike in India to check inflation, it becomes favourite spot for hot money $ is devaluated against Other Currencies With a higher interest rate leading to overall flat liquidity in the market
  6. 6. Impact on Trade DeficitImpact on Trade Deficit
  7. 7. 2007-2010 (US Crisis)2007-2010 (US Crisis) The financial position of US was set to weaken Macro economic indicators were still weak Dollar index reached the lowest point in Q4 2010 Diversification out of the Dollar Threat from the Chinese Economy
  8. 8. (Cont....)(Cont....) Rush to dump the US Dollar and to accumulate gold and other more stable currencies China had started BILATERAL TRADE in Yuan with a number of Asian and African Countries OPEC shifted to more stable currencies
  9. 9. Effect On CommoditiesEffect On Commodities  Commodities are $ denominated thus along with the $ the commodity prices are likely to become cheaper in currencies that revalue them  This is likely to make countries like CHINA hoard metal like copper to boost future growth thus increasing its demand. This would lead to SPECULATIVE BUYING OF COMMODITIES  Furthermore, with LOW INTEREST RATES and high inflation people like to hedge with commodities. This would lead to HIGHER COMMODITIES PRICES  Low interest rates make bank deposits useless specially if the inflation is higher than the rate
  10. 10. Effect on GoldEffect on Gold Gold is a HEDGE AGAINST INFLATION and uncertainty With Low Interest Rates; slow and uncertain recovery of the global economy of US, the GOLD PRICES ARE LIKELY TO HOLD STRONG. Uncertainty of USD has prompted countries to SHIFT RESERVES TO GOLD All major economies are shifting to Gold
  11. 11. (Cont...)(Cont...) All major economies are shifting to Gold Countries are diversifying the forex reserves US holds highest volume of Gold in the world China gold holdings also surged to a great level and now is the fifth largest Gold holder in the world
  12. 12. Effect on Oil prices and its impact onEffect on Oil prices and its impact on both emerging and developed marketsboth emerging and developed markets Uncertainty of USD will raise the Oil Prices Rise in crude prices has an INFLATIONARY EFFECT Therefore, it will slow down growth in the emerging markets
  13. 13. Impact on emerging marketImpact on emerging market currencies and on its economycurrencies and on its economy  Flight of USD to emerging markets has led to the appreciation of the Local currency. This has ramifications on the exports of the country and overall BOP  Countries are artificially devaluing their currency to pep up exports. US has lately asked to China to revalue to its currency as they were in a disadvantageous position and threatened to retaliate
  14. 14. Understanding International DebtUnderstanding International Debt Due to quantitative easing, USD and other major currencies are devalued As a result repayment of debt becomes expensive
  15. 15. Effect On BondsEffect On Bonds  Excessive Demand  Demand of Treasury Bills likely to go up  Go long as prices are expected to increase
  16. 16. QE Impact onQE Impact on European UnionEuropean Union QE will induce excess USD into the US economy This will lead to the Devaluation of USD against other currencies This is not favourable for exports by EU to US, thus will have a negative effect on EU
  17. 17. Impact On Chinese EconomyImpact On Chinese Economy  China artificially maintains a devalued Yuan  There is a limit to the amount of USD which a central bank can hoard  Excessive Yuan in the market will lead to inflation  Thus, it is inevitable that China revalues
  18. 18. Reserves Of ChinaReserves Of China  Due to artificial revaluation large assets have been built up in China  It is estimated that about 70% of China’s foreign exchange reserves are invested in dollar assets  A stronger Yuan would attract “Cross-Border Arbitrage “ funds because of the country’s relatively higher interest rates
  19. 19. (Cont..)(Cont..) Proceeds from exports would also rise as global recovery generated demand for Chinese goods With FDI expected to increase steadily, China will be facing greater pressures from the rising amount of foreign exchange inflows. Any sudden revaluation will prompt rapid sale and may cause a Bubble effect
  20. 20. (Cont..)(Cont..) Gold purchases could help China reduce the risk of holding large volumes of US dollar assets as a major part of its foreign exchange reserves Purchases could push up gold prices sharply. Also, the average long-term returns on investment in gold are low. If China purchases gold on the international market price will surge which would in turn affect Domestic Individual Consumers

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