Currency Markets Revealed

Currency Markets Revealed

February 2014

Simon Derrrick presents Currency Markets Revealed play

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Now that the Federal Reserve has begun tapering its bond purchasing program, one wonders if another event, such as an emerging markets crisis, might not prompt it to change the plan.

Now that the Federal Reserve has begun tapering its bond purchasing program, one wonders if another event, such as an emerging markets crisis, might not prompt it to change the plan. The agency super-charged markets following the financial crisis by purchasing securities at the rate of $85 billion a month. That has dropped by $10 billion since January to purchases of about $75 billion a month.

Simon Derrick, BNY Mellon's Chief Currency Strategist, is concerned the Fed might move even slower to wind down quantitative easing, should a crisis arise. He cites history for this, highlighting a tendency by the agency to overreact to crises. "That was the case in 1998 and in 2007," he says. It's a pertinent point for those seeking a return to normal market activity — financial markets that are less prone to bubbles, where currencies are fairly valued, and a global economy un-skewed by extreme monetary measures.

The thing that concerns me is actually that the Federal Reserve doesn’t stick to its program of pulling back on quantitative easing. There is some past history that suggests that the Fed can be reactive to crises when they develop.

Simon Derrick, Chief Currency Strategist, BNY Mellon Markets Groups

Tapering impacts emerging markets, for as policy conditions in the U.S. and UK normalize, the emerging world is expected to receive less inflows. But Simon isn't too concerned. Countries such as China and Russia are moving to relax restrictive currency policies. So, is a crisis likely, one that would cause the Fed to abandon tapering? Simon doesn't think so. If anything, he suspects a crisis in the emerging world would only be "a bump in the road."

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