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 .

. but in long term.Any inflationary effect expected in the domestic US markets? Is there a possibility of Keynesian Liquidity trap? ‡ Inflation effect not in short term. ‡ Low economic growth could increase the possibilities of Liquidity Trap.

‡ Prices will shoot up ± Example: Silver .Effect on international commodity prices especially metals? ‡ Fear of inflation with economic stimulus ‡ Commodities provide a safe haven.

‡ Position: Long .What position Long or Short would you take on Copper? ‡ Fear of inflation with economic stimulus + ‡ Commodities provide a safe haven.

.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.

gold prices are going up for so many years. and lowering the value of the US dollar. ‡ Also. diluting the money supply. hence. gold is turning into an attractive way to hedge again possible future inflation. .Which speculative position on Gold would you take? ‡ As The Federal Reserve puts hundreds of billions of dollars into the economy. 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.

prices of bonds will shoot up ‡ Yield inversely proportional to price ‡ Position: Long ± Yield will go down and prices will increase in future .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.

the process of QE is reversed i. It is used to buy government bonds from financial firms to pump money into the economy ‡ Once recovery has been established.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. newly created money is destroyed by selling back bonds to banks and other financial firms .e.

South Korea. India. ‡ Carry trade is set to hit Brazil.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. Taiwan who are likely to put in place capital controls to limit excessive inflows . China. Argentina. Thailand. Peru and Indonesia.

‡ 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. .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.

‡ 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. and its multiplication ‡ Because of the liquidity the Treasury bills now yield less than 1%. ‡ 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.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 . ‡ It is not a creation of assets as much as the creation of debt. and banks can draw freely on Fed credit. .at other countries expense.

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 .

South Korean debt) .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.

China also has started to gradually revaluing its Yuan upwards against the dollar over a period of time from 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 .4% from 3. An appreciation in the currency due to dollar inflow is detrimental to the export business There will obviously be a direct impact on inflation (4.5% 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 ‡ ‡ ‡ ‡ ‡ .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 18.81 to 6.

China Capital controls and protectionism Russia too on gold-buying spree(775 tonnes). along with International Monetary Fund reserve positions. 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.China recently increased its Gold Reserves. Increase foreign exchange minimum reserve requirement to maintain stable exchange rates.Bank of Indonesia. and to deter them from holding huge and unproductive foreign exchange reserves as a safeguard ‡ ‡ ‡ ‡ ‡ ‡ . special drawing rights and gold bullion. 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. India too bought 200 tons of Gold from IMF.

long term.3 % in 2011 * Source: Bloomberg .7 bn $) ‡ One-month offshore non-deliverable forward contracts were quoted at 45. Short term. weaker than the onshore spot rate.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.stronger Rupee ‡ Slow down of rupee rally ( fall by 1.15.fall in Rupee.2 % by Dec 31st ) ‡ Resume rally-up by 5.

± So buy the bonds now. sell later. .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.

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