FX Corporate TreasuryProprietaryQE2 Implications Beyond a Weaker USD for CFO’s to Consider

November 4, 2010by John Galanek

First, as we’ve already seen, the price of money at which US corporations can issue debt is at historic lows, and with the latest round of QE2, may go even lower. If you would rather issue debt than equity to grow your company or restructure the balance sheet, and your company has decent credit, this is a good time to do so.

Second, the not so good news, is the law of unintended consequences. There is no doubt that significant capital flows created by QE2 are going to find their way to emerging economies, which are already overheating and facing the challenges of overly strong currencies.

We are already seeing policy responses in the local economies. Brazil recently increased the tax on capital inflows to 4% from 2% in an effort to stem currency appreciation and keep money from flowing into Brazil too quickly.

The next round of policy responses from the emerging world could be in the form of trade wars on imports and exports (taxes, fees, government subsidies, etc.) rather than capital controls.

Developed nations cannot afford much more currency appreciation either. In Japan, the Bank of Japan (BoJ) has already begun to battle Yen strength through direct currency intervention in the market. The Yen is now trading near 80 per USD, and carmaker Nissan, for example, has trouble making a profit with the Yen below 90 per USD.

Potential capital controls and trade protectionism from abroad should be thoroughly investigated before CFO’s sell those cheaply-borrowed dollars to make overseas investments.

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