Quantitative Easing Plan 2

Group Members
• Akanksha Sharma (05)
• Ankita Bharadwaj (08)
• Arjun Kachru (10)
• Kartik Jha (28)
• Preeti Baruah (41)
• Ramit Mehra (48)
• Rhituparna B (51)
• Sachin Gupta (56)
• Vineet Bahri (67)
Lighter side…
 What will be the long term effects in the
Dollar?
• Dollar value vs. other currencies will go down
• Investor confidence
 Any implications on US trade deficit?

• Will shoot up
– Depreciation of $ will hit the imports
– Commodity prices will shoot up
Any inflationary effect expected in the domestic US markets? Is
there a possibility of Keynesian Liquidity trap?

• Inflation effect not in short term, but in long term.

• Low economic growth could increase the possibilities of
Liquidity Trap.
 Effect on international commodity prices
especially metals?

• Fear of
inflation with
economic
stimulus
• Commodities
provide a safe
haven.
• Prices will
shoot up
– Example: Silver
What position Long or Short would you take on
Copper?
• Fear of inflation with economic stimulus +
• Commodities provide a safe haven.
• Position: Long
What are your views on Gold price movements,
upward or downward and why?
• Gold is a lucrative hedging option
• Prices will shoot up.
• Gold price has been on a rise
• QE will be just another factor contributing towards this.
Which speculative position on Gold would
you take?
• As The Federal Reserve puts hundreds of billions of
dollars into the economy, diluting the money supply,
and lowering the value of the US dollar, gold is
turning into an attractive way to hedge again possible
future inflation.

• Also, gold prices are going up for so many years,

hence, it come across as a good deal to go long on it.
 Effect on oil prices and its impact on both
emerging and developed markets?
• Oil traded in dollars

• Availability of money will cause development in turn increase

demand for oil

• Rise in oil prices will fuel inflation especially in emerging

markets clubbed with rise in commodity prices

• Magnitude of effect will be larger in developing markets as

inflation will hit developing markets more than developed
markets.
 Any effect on emerging market currencies and its impact on
their economy? Do you think there may be a currency war
between emerging markets, a subject hotly debated and
causing major panic in G20 meetings?

• QE => excess US $ in emerging markets

• Local currency appreciation
• Central banks will have to go for “sterilization” to manage this
appreciation
• Currency war in between emerging markets likely:
– Exports to US will get hit badly due to local currency appreciation
(more USD required for every payment)
– Central banks will try preventing this
– Eg: The recent Chinese reluctance to keep Yuan low.
 Effect on Yields on the Debt markets in the US? Will there be
any change in the demand for US treasury Bills? On an
immediate basis would you go Long or Short on US Treasuries?

• Heavy buying of T-Bills in the US

• Demand and eventually, prices of bonds will shoot up

• Yield inversely proportional to price

• Position: Long
– Yield will go down and prices will increase in future
Would there be any Impact on the US in terms
of their international debt outstanding?
• QE2 will reduce international debt

• New money is created out of thin air. It is used to buy

government bonds from financial firms to pump
money into the economy

• Once recovery has been established, the process of

QE is reversed i.e. newly created money is destroyed
by selling back bonds to banks and other financial
firms
 Will the US Carry trade increase or decline?
Which markets will these funds shift to?
• US carry trade is likely to increase after QE2

• Low interest rates will lead to borrowing dollars and investing them
in emerging market economies to earn higher rates

• Many emerging economies have voiced serious concerns regarding

such speculative flows since they push up the value of emerging
market currencies and create asset bubbles.

• Carry trade is set to hit Brazil, India, China, Thailand, South Korea,
Peru and Indonesia, Argentina, Taiwan who are likely to put in place
capital controls to limit excessive inflows
 Emerging markets such as Brazil sell Dollar
denominated high yielding bonds, what may be
the effect on US due to this?
• US starts buying the govt bonds: Thus an increase in the
supply of dollar in the market.

• Brazil : ends up absorbing dollars from the world market.

• Brazilian Real has been appreciating wrt to Dollar – This will

get controlled due to the selling of Dollar based bonds

• The US will get effected positively - absorption of the excess

US dollars in an emerging market thus balancing the supply
and demand ratio.
 In your opinion would the financial position of
the US get weaker or stronger?
• The Federal Reserve and Treasury are seeking to inflate the economy out of debt - at
other countries’ expense.

• It is not a creation of assets as much as the creation of debt, and its multiplication

• Because of the liquidity the Treasury bills now yield less than 1%, and banks can draw
freely on Fed credit.

• Short Term Gain : With the current measures US will be able to protect themselves
from a fall and might be able to come out of deflation and restore some kind of
inflation into the economy.

• Long Term implications: In a longer run this will affect the US in a negative manner as
it is pumping in dollars into the world economy by creating more dollars which will
become a surplus once the economy stabilizes.
 Would the QE2 have a positive or negative
effect in European Union recovery?
• Definitely a positive impact

• Availability of money will improve investments in

European nations

• Boost their economy and help them recover

• European countries are in a lot of debt and there is a

serious need of injecting money in these nations
 Any chances of asset price bubbles forming in
China? What will be the impact on Chinas
Foreign exchange reserves?
•China an export oriented economy

•Major importer: US

•Increase in capital investments in China with QE

•Excess local currency supply

•Inflation
–increase in asset prices

•With reduced confidence in USD, will shift its Forex reserves.(Japanese debt,
South Korean debt)
China also has started to gradually revaluing its Yuan upwards against the dollar over
a period of time from 6.81 to 6.63 Yuan to a Dollar and is also facing international
pressure to do so. What will be the impact of China in case the peoples Bank of
China wishes to do sterilisation since there may be big inflow of dollars which needs
to be mopped up by the central bank to manage the current fixed peg? Any direct
economic impact on Chinese economy?

• China is the largest exporter and to support this it maintains a devalued currency when
compared to dollar .

• An appreciation in the currency due to dollar inflow is detrimental to the export business

• There will obviously be a direct impact on inflation (4.4% from 3.6% October 2011)as the
central bank will try and buy the dollars and in turn pump in local currency (yuan)

• required reserve ratio increased by .5% to all time high of 18.5% hence increase in interest
rate which in turn will affect exporter importer and in turn the exchange rate

• Rising interest rate will invite more foreign investment and the cycle will continue
 China recently increased its Gold Reserves; India too bought
200 tons of Gold from IMF. Would the rest of the world make
any changes in their foreign exchange reserve components?
Give a brief explanation of what changes may occur and why?

• Forex reserves consist of securities and deposits denominated in overseas currencies, along
with International Monetary Fund reserve positions, special drawing rights and gold bullion.

• Increase foreign exchange minimum reserve requirement to maintain stable exchange rates.-
Bank of Indonesia, China

• Capital controls and protectionism

• Russia too on gold-buying spree(775 tonnes), moves to Canadian debt instruments

• Diversify reserves into emerging market currencies

• Switch to IMF bonds

• The aim is to protect emerging markets from disruptions caused by sudden changes in capital
flows, and to deter them from holding huge and unproductive foreign exchange reserves as a
safeguard 
 A Speculator may take which position on the
dollar-Rupee currency pair?
Weaker Dollar because of QE II
• Dollar depreciating against other currencies
• Huge Foreign capital inflows because of better yields
• Hike in interest rates to contain inflation

Not much appreciation of Rupee on account of:

• Large oil imports due to high demand
• Capital account deficit (13.7 bn $)
• One-month offshore non-deliverable forward contracts were quoted at 45.15, weaker than
the onshore spot rate.

Short term- fall in Rupee, long term- stronger Rupee

• Slow down of rupee rally ( fall by 1.2 % by Dec 31st )
• Resume rally-up by 5.3 % in 2011
* Source: Bloomberg
 Should you go Long or Short on emerging
market high yielding debt instruments such as
sovereign bonds?
• These bonds have a higher risk of default or other adverse
credit events

• But typically pay higher yields

• GO LONG

• Because:
– Bullish market
– Inflation leading to a rise in bond prices and fall in bond yield.
– So buy the bonds now, sell later.
Thank You