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Video: Market Distortion from Monetary Policy Sows Future Risks

Video: Market Distortion from Monetary Policy Sows Future Risks

John Kicklighter, Chief Strategist

Talking Points:

  • Accomodative monetary policy - rate cuts and stimulus - helped avert a full collapse in global financial markets
  • Persistent easing has broadened the distortions in price and valuation with considerably more cost than reward
  • Wringing value in a low-yield world is difficult; but against the specter of rising risks, it's dangerous temptation

See the DailyFX Analysts' 2Q forecasts for the Dollar, Euro, Pound, Equities and Gold as well as our favorite 2016 trading opportunities in the DailyFX Trading Guides page.

Pragmatic traders react to monetary policy not in frustration that the old order of 'normal' pricing has passed, but adapt to it its influence to map out trades. However, monetary policy itself does not maintain a uniform impact on the markets. Over the past years, the focus has been either on front-running 'moral hazard' as investors took advantage of the manufactured, low-risk environment or spot FX trades where the disparity in policy bearings could be leveraged. Both of these streams have shifted. Relative monetary policy is now exceptionally nuanced when it comes to actual yields (a side effect of global rates being driven down to zero) and the qualitative measures have exerted much of their influence. The Dollar may be the best option for a lasting, direct influence on this basis. Meanwhile, 'moral hazard' has drawn in considerable speculative assets with investors growing increasingly cautious about adding to their exposure. The divergence in the 'cost' of investment and the expected 'return' pose serious value gap which may threaten stability. We look at the shifting influence of global monetary policy on our trading in this weekend Strategy video.

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