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Alternative Market Briefing

The Big Picture: As central banks ease monetary policy, some expect more surprises

Thursday, February 05, 2015

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Francesco Filia
Benedicte Gravrand, Opalesque Geneva:

IN the last few months, several central banks have tried to put a brake on deflation through monetary devaluation to stimulate exports and encourage growth. This is creating volatility in the foreign exchange market, which has just been through a long period of calm. And some expect a more eventful market ahead.

There are two reasons for this volatility, according to The Economist. The first one is a divide between the US Federal Reserve, which stopped its quantitative easing (QE) program and may strengthen monetary policy soon, the Bank of Japan, which is still pursuing its QE program, and the European Central Bank (ECB), which has just started its own. This is driving the dollar higher against the yen and the euro. The second reason is falling commodity prices, which may lead to weakening economies in producing countries, and many central banks to cut interest rates (11 have done so since November).

"The problems are exacerbated where a country has decided to peg its currency to another," the paper adds, as pegs are a way to reduce volatility.

Conor O’Mara, CIO at Three Rock Capital Management, Dublin, which manages a global macro hedge fund with a strong FX focus, believes major currencies will end up re-aligning.

"While divergence exists a......................

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