The Dollar and QE

With the end of QE (Quantitative Easing) comes the end of money printing.  Is the end of the QE program bullish for the dollar since supply will no longer be flooding the market? To answer this question, I took a look at some history. Being a technician, I use past events to try and determine future ones. We already had the massive QE1 program in 2008-2010.  As they say history likes to rhyme, so will it rhyme again in June when QE2 is over?

The Facts

  • When QE1 was started, the $USDX (Dollar index) was at at 85
  • When QE1 was expanded dramatically, the index was at 84.19
  • At the end of Q1 2010, QE1 finished, the dollar index sat at 81.47
  • When Bernanke hinted at QE2 on August 2010, the dollar index sat at 82.89
  • With the start of QE2, the dollar index sat at 78.10

 

$USDX (Dollar Index) Weekly chart

 

 

 

 

 

 

 

 

 

S&P 500 ($SPX) and QE [courtesy of  www.calculatedriskblog.com]

 

 

 

 

 

 

 

 

 

 

 

 

 

Will the Dollar die?

Unless we continue implementing QEs constantly (which I don’t see us doing), I don’t see the dollar dying/collapsing anytime soon. The fed already implemented two huge QE programs and the dollar has so far survived (I consider a collapse if its under 60). Yeah, it is not doing well at all, but to say that the dollar is collapsing right now is a big misnomer. It is just trending down on low volatility. In fact, with the end of QE2, I expect the dollar to rip higher. At the end of QE1, the dollar was down only about 3.5% since the start of QE1 (despite over $1 trillion in purchases by the fed). Then in the following 2  months the dollar ripped about 7 points and was sitting in positive territory (+1.7%)  until the fed hinted on QE2 on August 27 where it took a dive as everyone started front-running/pricing in QE2.

With everyone talking about how the dollar is dying because we are printing so much, the index is only actually down ~5% since the start of QE2. I don’t consider that bullish at all but I don’t consider that  ’doomsday’ action either.  People must remember the dollar index is weighed against other currencies and NOT gold or silver. For it to ‘crash’, the Euro (57.6% weight), Yen (13.6%), Pound (11.9%), Canadian Dollar (9.1%), Krona (4.3%) and Franc (3.6%) all need to move higher in order for the dollar to move lower. To me, I don’t see this scenario happening. The Euro, Pound, and Yen all are currencies to troubling economies. The Canadian Dollar,Krona, and Franc, although are currencies of decent/strong economies, they don’t have a high enough weighting in the index to dramatically effect the dollar.

So what do I see happening to the dollar in the following year? Its very hard to tell. Anything can happen. We can crash to new all-time lows or we can move back above 80. Who knows. All I know is, from what I can tell from history is that I wouldn’t want to be short the dollar going into summer as QE2 ends. Even if QE3 was to be implemented, it wouldnt go into effect until later  part of this year, giving the dollar much time to get some ‘breathing room’.

 

Sources:

http://www.calculatedriskblog.com/2010/10/qe1-timeline.html

http://bit.ly/gLyhju

http://www.marketwatch.com/investing/index/dxy/historical

 

The information in this blog post represents my own opinions and does not contain a recommendation for any particular security or investment. I or my affiliates may hold positions or other interests in securities mentioned in the Blog, please see my Disclaimer page for my full disclaimer.

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