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Dovish Canadian Bank – Part 2

Discussion and Analysis by Charles Porter:

 

Hawkish monetary policy rhetoric has enveloped financial markets, and particularly currency markets, over the past couple of weeks. High volatility has prevailed, even within the most developed currencies. The Bank of Canada was the exclusive major developed economy to have ‘walked the walk’, and raise interest rates earlier this month. This article analyses Bank of Canada Governor Stephen Poloz’s St John’s Board of Trade speech today and its impact upon the Canadian Dollar. Here we consider the speech having contextualised Canadian monetary policy in Part One.

 

Today, Stephen Poloz, Governor of the Bank of Canada, spoke at the St John’s Board of Trade. The Governor’s tone appeared to have partially internalised this fact. Speaking about the supremacy of the price level when determining monetary policy, Dr. Stephen Poloz spoke of a target rate of 2% annual inflation, however, a wider permissible band of 1%-3%. Moreover, Poloz praised and justified the monetary policy stimulus that the Bank of Canada provided in 2015.

 

There appeared to be a dichotomy, even a paradox, within Dr. Poloz’s Board of Trade talk. Speaking about the decision-making process of the Bank of Canada, the Governor spoke about the primacy of economic models. However, he mentioned that any use of economic models is conditioned by judgement, most of which is informed by “conversations with people”. Invoking ideas of a pragmatic and holistic policy-making process, the speech aimed at showing the stability and responsibility of the Bank.

 

The paradox or confusion arises from the Governor’s conclusion: “we could still be surprised in either direction” and monetary policy will be “particularly data dependent”. Seemingly in conflict with the sentiment throughout the speech, Poloz admonished listeners that “there is no predetermined path for interest rates”.

 

Much of the confidence in the capacities of a central bank, particularly when threatened by extra-ordinary monetary policy circumstances, is from an anticipated, stable and forecasted monetary policy. Forecasting expected interest rates hikes, as for example the ECB, the Bank of England and the Fed rely upon heavily, allows markets to internalise and price in the effect you want to see in the market before central bank action. In effect, therefore, the actual monetary policy stimulus or tightening must only be announced, not even effected; if banks internalise a deposit rate hike, they will begin to normalise it within the interbank rate at the forecasted, internalised level.

 

Therefore, to claim the data dependence of monetary policy and to admit there is no forecast for interest rates may be viewed by some as central bank suicide. The two-fold effect of an internally conflictual speech alongside a lack of predictability regarding future rate movements may inject uncertainty within the market and, ultimately, undermine confidence within the Canadian central bank.

 

It is therefore unsurprising that the Canadian Dollar suffered strongly during this announcement. During Poloz’s speech, the Loonie fell by around 0.65% against the US Dollar, the most significant currency cross when considered on a trade weighted and current account basis. The currency continued to depreciate against the US Dollar throughout the late trading session, perhaps whilst the uncertainty and low-confidence took hold. These shifts are visible in the chart below.

 

The conclusions emanating from the Bank of Canada suggest that the Canadian Dollar will be more volatile when hard data announcements are made. Whilst this increases risk, the importance and value of integral analysis on the Canadian Dollar similarly increases. Whilst markets currently price the probability of a further 2017 rate hike pessimistically following the speech, data, particularly CPI inflation, will shock the value of the Loonie over the coming months. Once again, the environment that those trading within Canadian Dollar will face increases the value of currency hedging.

 

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Dovish Canadian Bank – Part 1

Discussion and Analysis by Charles Porter:

 

Hawkish monetary policy rhetoric has enveloped financial markets, and particularly currency markets, over the past couple of weeks. High volatility has prevailed, even within the most developed currencies. The Bank of Canada was the exclusive major developed economy to have ‘walked the walk’, and raise interest rates earlier this month. This article analyses Bank of Canada Governor Stephen Poloz’s St John’s Board of Trade speech today and its impact upon the Canadian Dollar.

 

Canada was arguably not the most likely candidate for a rate hike decision during their September meeting. The main reasoning behind this belief is the low rate of inflation within the Canadian economy preceding the date of the decision. Moreover, low inflation is thought to be generated from the relative price decrease in imported goods.

 

The price of imported goods has fallen because the strength of the Canadian dollar has increased sharply, by over 12% against the US Dollar, since May through to early September this year. The US economy is Canada’s main trading partner, both in terms of exports and imports, dominating both sides of the currency account balance. Therefore, the price of Canadian exports from the perspective of the US Dollar has risen dramatically, putting downward pressure on the demand for Canadian good outside of its borders. This will spill over into aggregate demand and ultimately economic performance and growth.

 

A hawkish monetary policy decision, one in this case to raise and tighten interest rates, will cause an inflow of money into the domestic currency. Money enters the economy due to the higher rate of return and increased reward for saving. This effect causes a simultaneous appreciation of the Canadian Dollar because currency pairs will clear at higher rate according to the increased demand for money. Therefore, an interest rate hike would appear to be the Canadian economy shooting itself in the foot!

 

Indeed, at the time, perhaps the only macroeconomic indicator in favour of a rate hike was the economic growth performance, as measured by Gross Domestic Product. However, economic growth does not need to be curtailed through monetary policy if it does not manifest as inflationary pressure, or unsustainable growth. If economic growth is either organically insulated from macroeconomic (or microeconomic-bubble) spill overs, it may be allowed to continue, unconstrained. Therefore, given the non-inflationary rapid and sustainable growth within Canada, the decision to harm the exchange rate for exporters, amidst lower general inflation, is surprising.

 

Having contextualised the Canadian macroeconomy, Part Two of this article analyses the fall in the Canadian Dollar that we witnessed whilst Poloz spoke.

SGM-FX buildings

Angela Win; Anglo Win?

 

Our Foreign Exchange Specialist, Charles Porter, speaks with London School of Economics Associate Professor, Dr. Waltraud Schelkle. Regarding Brexit, we discuss how the passing of the German election may accelerate progress within negotiations as well as the possibility, acceptability and likelihood of a Second EU referendum within the UK. 

 

Understanding the Brexit process, including the rate of progress and the final outcome, is critical when attempting not to get caught out by foreign exchange markets. Our analysis and opinion allows you to make informed decisions and exploit currency market fluctuations to find the best, unique, solution for you.

 

In this pursuit, below we have transcribed out interview with Dr. Schelkle from the video, also available on youtube. To convert this analysis of the current Brexit process into a tangible, effective and innovative foreign exchange saving, speak with our specialist and follow our analysis.

 

 

 

 

Charles Porter, Foreign Exchange Specialist, SGM-FX:

 

Today SGM joins Dr Waltraud Schlekle, who is Associate Professor of Political Economy here at the London School of Economics. Waltraud has been reading political economy for over eighteen years and it is an honour that she joins us here today.

 

So as we talk about going down either of these paths, the hypothetical deregulation or conformity outside of the European Union, yet still operating within the Single market; wherever we end up, do you think that the passing of the German election might actually facilitate some progress on the Brexit referendum; the secession process?

 

Dr. Waltraud Schelkle, Associate Professor, London School of Economics:

 

No. I happen to think, and what I hear in Germany is, that is, Merkel was briefly trying to be helpful when she saw, and I am afraid people like Boris Johnson do not help you very much. In this, they cannot be trusted, they are unknowing, the government does not know itself what it wants, then Merkel has made up her mind. I think her priority is getting the European Union in better shape. And for that, Britain at the moment is not at all helpful. Only Theresa May, and Theresa May in a strong position; that would be another matter. But the way it has gone, I think we just wait and see and unfortunately the clock is ticking for us who live here, in Britain.

 

Charles Porter, Foreign Exchange Specialist, SGM-FX:

 

Of course, so in terms of the European Council’s role: until the end, it might not be that significant. At the moment, it is between Michel Barnier and David Davis in order to start these negotiations. Do you think there is almost an impasse within European institutions that’s blocking Brexit progress at the moment? That’s the reason that I think, maybe, the passion of the German elections will free up European institutions to talk about Brexit.

 

Dr. Waltraud Schelkle, Associate Professor, London School of Economics:

 

No, I really don’t think that Germany is blocking anything in particular. I don’t even think there is an impasse, because the Europeans have given clear guidelines to Barnier, it’s very comfortable for him to say, ‘well I am just sticking to my brief’. While Britain has not come up with anything clear and the strategy you could negotiate about and you would see where, then, that the problems lie on the side of the Europeans; I am afraid we are not even there yet to see that!

 

And this means it’s a completely fantasy world to think that you can do that in the next year or so. I discuss it with my colleagues and they do not agree with me; I would think that we just wade into the next election and then we can have an election campaign, as it should be in a democracy, whether people are still warming to this after the first referendum; whether they still want Brexit. To me, that would be the proper way to do it. But my colleagues say they do not think that it will last that long and it’s half because they will wrap it up one way or another before the election campaign and labour will go with it.

 

Charles Porter, Foreign Exchange Specialist, SGM-FX:

 

So to some extent, perhaps, in your view, maybe not your colleague’s, Vince Cable’s Liberal Democrat Party, and their line “having a second referendum once we know more”; that’s not anti-democratic to you? It’s not trying to railroad the first referendum?

 

Dr. Waltraud Schelkle, Associate Professor, London School of Economics:

 

No, actually that’s quite a normal scenario. If you look at the history of referenda, a friend of mine has done this; it’s quite often that you a second referendum. Now, I do understand why the British did not announce that from the start: I mean, if you had said to them, oh, yeah, we’ll have a second referendum! I mean, then the European’s have no reason to compromise on anything, right? Just let a hard Brexit be there as a threat and then people may back off. So I do understand this, but, at the same time, it is democratically the proper procedure.

 

This is what New Zealand recently did with its flag and then decided, in the end, for the status quo. That may happen because it is true, and it is a solid argument to say, yes, people voted for Brexit – yes or no – and the majority said yes; so now we try! But whether there was ever a majority for any of the options you have available after Brexit; that is not clear to me.

 

 

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German Elections and Brexit

Our Foreign Exchange Specialist, Charles Porter, speaks with London School of Economics Associate Professor, Dr. Waltraud Schelkle. Regarding Brexit, we discuss how the passing of the German election may accelerate progress within negotiations as well as the possibility, acceptability and likelihood of a Second EU referendum within the UK. 

 

 

 

 

 

 

 

 

 

Understanding the Brexit process, including the rate of progress and the final outcome, is critical when attempting not to get caught out by foreign exchange markets. Our analysis and opinion allows you to make informed decisions and exploit currency market fluctuations to find the best, unique, solution for you.

 

 

To Hedge or Not to Hedge – Part 2

Discussion and Analysis by Charles Porter

 

Today our social media interactions indicated an uptake in hedging options including the use of forward contracts. Specifically, corporations concerned about their exposure to import markets and international firms vulnerable to payroll and exchange transactions are seeking insure against downside risk and exchange rate fluctuations. The present uptake in hedging is explained by the strength of the Pound against the Dollar and, to a lesser yet significant extent, the Euro. This article concludes in favour of the appeal of hedging for your corporate and personal currency exposure.

Part Two – Is hedging advisable; are we at the peak?

 

Having produced an analysis of a post-Brexit Sterling devaluation in part one, the second part of this article seeks to understand whether Sterling’s present value is derived from a correction of the negative, post-referendum, currency effects. This in turn will inform a conclusion in favour of, or against, further hedging based upon whether the value is likely to be sustained or short-lived.

 

The value of hedging will therefore be partially determined by whether the pound’s current strength is a restoration of certainty or breakthrough on Single Market access. This will identify whether the pound’s strength is likely to be sustainably valued in the short and medium-term, or whether the present value is overweight and should be capitalised upon through hedging. Ultimately, we conclude in favour of the latter option.

 

Sterling’s current strength appears to be derived from short term shuffling by central bankers. An overwhelming volume of dovish central bank policy announcements have been accompanied by surprisingly hawkish statements. In fact, much of the pound’s revaluation has been propelled by speculation over future interest rate hikes and the reduction of monetary stimulus taking the form of a tapering of the asset-purchase program, quantitative easing.

 

The shift around mid-September that pushed, for example, Sterling-Euro through the Pound’s resistance level and Euro support levels was monetary policy rhetoric. Whilst the predominant rate-hike rhetoric was empirically supported by rising inflation and low unemployment, the overwhelming currency shifts based upon Sterling strength came from the words of individuals. For example, a characteristically dovish member of the Bank of England, Gertjan Vlieghe, spoke in London suggesting a Bank Rate adjustment “in the coming months”.

 

Furthermore, it is unlikely that the Florence Speech of Theresa May, UK Prime Minister, will be considered by the EU27 to be at all sufficient to progress with second round – future relationship arrangement – talks. This will be true should a back-door translation of May’s speech within the confidential meetings of UK and EU negotiators not facilitate progress and guarantees. Progression seems likely given that, despite the third-round dedication, a solution for the Irish border has not been found; neither EU citizens assured, nor an exit bill indicated.

 

Altogether, this suggests that Brexit uncertainty in particular has not been reduced. Therefore, a central mechanism behind Sterling’s long-term devaluation has not been addressed. Sterling’s gains may therefore not survive the medium term due to the rhetorical, intangible and underminable nature of its short term gains.

 

Ultimately, we must therefore conclude that for the risk averse individual, hedging may be a highly beneficial tool. With central bankers speaking in their droves this week, their individual positions should be elucidated, awarding limited predictability to sterling currency pairs. Nevertheless, the fragility of Sterling’s gains in non-normal monetary policy times should not be underestimated. Corporate requirements for hedging may include a protection of the Sterling costs of an international payroll, a reduction of importation expenses and value protection. Contact us to arrange any of these services.

 

 

To Hedge or Not to Hedge – Part One

Discussion and Analysis by Charles Porter

 

Today our social media interactions indicated an uptake in hedging options including the use of forward contracts. Specifically, corporations concerned about their exposure to import markets and international firms vulnerable to payroll and exchange transactions are seeking insure against downside risk and exchange rate fluctuations. The present uptake in hedging is explained by the strength of the Pound against the Dollar and, to a lesser yet significant extent, the Euro. This article concludes in favour of the appeal of hedging for your corporate and personal currency exposure.

 

The value of the United Kingdom’s Pound was certain to fall following a vote to leave the Union. This was a foreseen spill over of secession and caution was offered, although not always heeded. Whilst a devalued currency is often desired due to its capacity to make domestic exports more competitive, a sudden currency devaluation within an economy with a high marginal propensity to import is more troublesome.

 

The UK economy imports a considerable cross-section and volume of its total consumption. Therefore, an extremely non-negligible proportion of the Consumer Price Index representative basket of goods is either a direct import, or dependent upon imports to some extent. As the principal measure of price inflation, we can credibly assume, therefore, that a weak pound will raise inflation.

 

To evaluate the benefit of hedging any exchange rate risk it would be important to understand any corporate or personal exposure to currency fluctuations. However, to generalise this analysis, an evaluation of the present valuation of the Pound Sterling amongst the post-Brexit paradigm is presented.

 

Against the United States’ Dollar, the Pound Sterling now trades above or around Sterling’s value on the 24th June 2016; the day after the EU referendum. From this perspective, it is plausible that the Pound may have secured a justified, or unsustainable, overweight value against the Dollar. However, in order to analyse the benefit of hedging it is necessary to establish whether the upwards correction in the value of the pound is a response to the underlying cause of its June 2016 devaluation (and thus correctively sustainable) or alternative, short-run movements.

 

There were two predominant and widely understood mechanisms that led to a post-Brexit devaluation of the Pound Sterling against most other currencies. In fact, due to close pre-referendum polls that were, at points, even within the estimation-error bounds, the Pound Sterling was undervalued for a hypothetical Remain decision leading up to the 23rd June vote. These two mechanisms are similar: firstly, there is a normative (negative) value regarding uncertainty of a Brexit vote. Secondly, the more tangible threat of a preclusion from the world’s largest single market also leads to investment and trade concerns.

 

International and domestic investment is promoted by the Single market due to the free movement of people, capital, goods and services, in addition to a common set of laws under the arbitration of one, Court of Justice of the European Union. Whilst the ‘value’ of a Brexit is not something our analysis can capture due to the personal and individual nature of a vote within an in-out referendum, it is undeniable that the short and medium-term concerns in the absence of a concrete post-secession trading and passporting arrangement will cause speculation against the Pound.

 

Many of these effects generate further pressures that will devalue the currency. For example, the reduction in foreign direct investment or domestic investment due to uncertainty or deliberate flight derived from the tangible cost-benefit analyses regarding the future loss of access to a single market can potentially ruin the exporting capacity of an economy. Moreover, the current account deficit that the UK runs may no longer be financed by capital inflows. Therefore, whilst the exchange rate may make British goods appear more competitive, the performance of the economy may deteriorate. Exports must necessarily be financed by external capital flows into the domestic, British, economy. Therefore, should the automatic stabilising force be precluded from functioning, the Pound will struggle to recover and its devaluation exacerbated.

 

Having produced an analysis of a post-Brexit Sterling devaluation, the second part of this article seeks to understand whether Sterling’s present value is derived from a correction of the negative, post-referendum, currency effects. This in turn will inform our a conclusion in favour of, or against, further hedging based upon whether the value is likely to be sustained or short-lived.

 

 

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Will Risk off Prevail

Discussion and Analysis by Charles Porter:

 

Today holds considerable upside potential and downside risk within major currency pairs. Before our publication of a week in review and week ahead report, this article guides you though this tumultuous Friday and weekend. The events covered include North Korea’s supposed threat and Theresa May’s speech in Florence: from the Peninsula to Tuscany; Dotards to Brexit.

 

There will be considerable volatility within Sterling currency pairs this afternoon. The volatility will be significant and definite, manifesting as either an appreciation or depreciation of Sterling. The direction of the currency movement will be determined by both the content and rhetoric surrounding Theresa May’s speech in Florence, Italy, this afternoon.

 

The Florence speech should be a defining moment within the premature-secession negotiations. There are strong expectations for Theresa May to request a formal transitional period, likely for a fixed period of two years. Moreover, there is a strong indication for a budgetary contribution elucidation, or exit fee, in the order of 20 billion Euros. Whilst this figure is unlikely to be cited, it will be implied within the rhetorical guarantees of the UK Prime Minister.

 

Any offer that the debate surrounding Theresa May’s speech in Florence determines to be sufficient to assure the progression of Brexit negotiations will see the Pound rally. If, for example, Cabinet ministers and negotiator, David Davis, join the Prime Minister on her trip to Italy, then this will signal unity within the government and award credibility to the content of May’s speech. Therefore, the normative rhetoric surrounding May’s speech may prove to be as market-sensitive as its more solid content.

 

The converse is also true. The strong expectations that have surrounded the speech mean that a certain value has already been priced within the Pound Sterling. A strong consensus over the base case of the speech amongst investors means that falling short of the anticipated guarantees will devalue the pound. For example, citizen’s rights are expected to be partially addressed and safeguarded.

 

However, the expectation is for a demonstration of attention and care, not meaningful offerings. Any announcements containing a tangible offer will strengthen the Pound, any deviation away from addressing EU citizens’ rights will weaken the Pound. The propensity to affect the Pound Sterling derives from the preclusion of trade negotiations before significant first-round progress. A strong speech will constitute or finalise progression within the first round.

 

Within the wider, global, economy a risk off strategy and capital flight towards more safe assets may affect major currencies. There is expectation-derived evidence that this has already happened, however, any manifestation of the treats emanating from the Korean Peninsula may develop these movements.

 

The dangerous rhetoric surrounding the nuclearisation of North Korea intensified during early morning trading. Tensions between North Korea, neighbouring South Korea, Japan, and the United States have mounted. This follows US President Donald Trump’s address to the United National General Assembly this week. Derogatory comments labelling the North Koran leader, ‘rocket man’ and the retaliatory branding of Trump a ‘dotard’ are suggestive of an intensification of North Korea’s intentions.

 

Rising geopolitical risk, including the threat of nuclear proliferation and deployment, will force capital out of developed markets and into safer assets. Safehaven assets, those whose prices move inversely to developed market normal assets and currencies, primarily include Gold, the Japanese Yen and Swiss Franc, as well as treasuries. The performance of the Japanese Yen, given its inclusion within the threat, may be unpredictable. A rise in geopolitical risk will typically appreciate the Yen because of capital inflow within the safehaven currency. Given that Japan and the Japanese economy may itself be implicated within the risk, the performance of its currency may be uncharacteristic.

 

For now, the pound awaits the progression of Prime Minister May’s speech in Florence. The US Dollar weakened early this morning whilst gold, the Japanese Yen, and the Swiss Franc all appreciated following the news. Whilst geopolitical risk has remained at the centre of investors’ radar, the movements have been muted either through market ambivalence or a pre-existing pricing in of the risk. However, a tangible manifestation of this rhetoric, including the firing of a hydrogen weapon into the Pacific Ocean, will see extremely severe risk-off movements.

South African Reserve Bank Holds Rates

 

Discussion and Analysis by Charles Porter:

 

The South African Reserve Bank held interest rates steady following today’s September Committee meeting. The Bank held the repurchase rate at 6.75% despite an equal division within the Monetary Policy Committee.

 

Three members preferred an unchanged stance and three members preferred a 25 basis point reduction. This status-quo decision undermined a consensus forecast predicting a loosening of monetary policy of at least, if not more than, one-quarter of one percent. The bias prevailed because the Committee foresaw considerable and developing uncertainties within the South African and global economy. Therefore, abiding by the trend set by the European Central Bank, Federal Reserve and Bank of England, further data will determine the future direction of Monetary Policy.

 

The South African economy moved out of recession during the second quarter of 2017. Although the preceding period of six months, Q4 2016 and Q1 2017, only demonstrated the shortest period definable as a recession, quarters of negative growth have been littered across the south African economy. Therefore, the 2.5% GDP growth that was published earlier this month remains uncertain.

 

In fact, the decomposition of South Africa’s Q2 GDP reveals that the swing towards positive growth was mainly driven by agricultural, forestry and fisheries industries; three highly cyclical and seasonal components of GDP and economic growth. Therefore, the publication’s admonition of a subdued longer-term growth seems appropriate. Moreover, a wide-ranging consensus over a modest interest rate cut also now becomes contextually intelligible.

 

The expectation for an interest rate cut within an uncertain and weaker South African economy was internalised and priced-in within the currency market. Therefore, when the Monetary Policy Committee announced its decision not to raise interest rates, the Rand strengthened sharply against the Pound Sterling, Euro and Dollar. Each of the three latter currencies sharply and simultaneously lost in excess of three-quarters of one percent.

 

Whilst each of these currency pairs recovered partially throughout the day, the sharp loss of value of the major currencies demonstrates the credibility awarded to the expectation of an interest rate cut within South Africa. Due to the importance awarded to future economic performance and data announcements within the determination of future monetary policy, we will await the final meeting of 2017 in November to identify whether monetary policy stimulus should be provided.

 

Skyscraper view

Federal Open Market Committee

 

Discussion and Analysis by Charles Porter:

 

Foreign exchange markets were eagerly awaiting yesterday evening, 19:00 BST. At this time, the highly anticipated Federal Open Market Committee was scheduled to publish their decisions regarding the United States’ (US) monetary policy. The Fed’s decision to normalise their heavy balance sheet was unanimous. The gradual withdrawal of Quantitative Easing (QE) will begin next month, in October. The controlled reduction of the balance sheet will amount, initially, to $10bn to moderate the reaction of treasury, equity and forex markets.

 

The program of QE within the US has led to an imbalance upon the Fed’s balance sheet of around $4.5 Trillion. Within the US, the plan is orientated towards government Treasuries and private Mortgage Backed Securities. The presence of a QE program exaggerates the accommodative and loose monetary policy provided by low interest rates. Thus, a curtailment, or tapering, of the QE program is the first, and crucial, step towards normalising monetary policy.

 

The Fed was widely expected to announce a deleveraging of the balance sheet. However, there were still concerns that low inflation within the US economy and an advancement of the more dovish members within the Committee may prevent imminent tapering. These doubts were partially allayed by the strong economic growth, measured by Gross Domestic Product, that the US has secured.

 

The relationship between monetary policy and the exchange rate, when the latter does not fall within the toolbox of the former, is unequivocal. A tightening of monetary policy, provided that it is received as a pragmatic and appropriate response by the markets, will generate two aggregate effects, both of which appreciate the domestic currency. Firstly, a tangible pecuniary mechanism will appreciate the currency. Secondly, a more normative confidence and expectation-based mechanism will increase the value of the currency.

 

The interest rate reflects the cost of borrowing money, for example, to finance investment. However, the rate of interest also reflects the reward for saving, and not spending, money. Therefore, when interest rates rise, holding the currency becomes more rewarding. This in turn generates an incentive for money to flow towards the rate-hiking economy. If the flow of capital is moving into the domestic currency, in this case Dollars, then the increased money demand increases its price.

 

Although not an interest rate, the QE policy instrument increases the money supply by effectively, although not physically, printing money. Raising the money supply in theory can stimulate the economy. However, it does force down the rate at which money supply and demand clear, thereby decreasing the value of the currency. The cessation or curtailment of QE therefore raises the equilibrium rate of the currency pair, representing an appreciation of the currency.

 

Emerging from the Great Recession, any tightening of monetary policy signals a successful national recovery and a healthy economy. This is a more normative and soft force that appreciates the currency. Because monetary policy is exceptionally loose across the developed world, a normalisation and tightening of monetary policy signals an emergence from the Crisis.

 

Unsurprisingly, therefore, the US Dollar, performed strongly following the Committee’s publication. The graph below shows the extent of the revaluation of the Dollar against the Euro. The percentage change from maximum to minimum is in excess of 1 percent. The gains made by the Dollar have been eroded slightly throughout trading hours today, particularly within Sterling. However, considerable upside risk coupled with strategic timing could save a lot of money on currency transactions.

 

 

Graph of EURUSD: Exchange rate of the Euro in US Dollars. The appreciation of the Dollar was seen across other currency pairs too. The gains against the Euro yesterday evening exceeded 1%. The pricing in of the monetary policy adjustment was gradual.

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Dormant Central Banks

 

Interview and Conversation between SGM’s Charles Porter and Dr. Waltraud Schelkle of the London School of Economics

 

 

This week, foreign exchange specialist Charles Porter spoke with Dr. Waltraud Schelkle. In this article we transcribe a segment of the full interview. It provides an analysis and contextualisation of the Federal Open Market Committee’s monetary policy decision later this evening, and Janet Yellen’s statements throughout this week.

 

 

 

 

                  Charles Porter, SGM Foreign Exchange

 

 

Today SGM joins Dr Waltraud Schelkle who’s Associate Professor of Political Economy, here, at the London School of Economics. Waltraud has been reading Political Economy for over 18 years and it’s an honour that she joins us here today:

 

We’ve heard Mario Draghi the other day, when he was at Jackson Hole. He said the global recovery is firming up. Philip Lowe echoed those remarks in Australia saying global growth is really quite good… despite the fact that it was not trickling down to Australia!

 

We had a Canadian rate hike decision and they also said that the global economy is just good enough for us to facilitate doing this now. And the Bank of England is almost doing the same thing; saying, ‘if growth continues we can look to put up interest rates in the next few months’.

 

Does that mean the global recovery really is over?

 

 

                  Dr. Waltraud Schelkle, London School of Economics

 

 

Yes, I think so. I have no better information than them so I trust they are right. I find it more puzzling why they are actually not starting and haven’t already started to raise interest rates. I am genuinely puzzled.

 

 

                  Charles Porter, SGM Foreign Exchange

 

 

And why is that? Where is the puzzle? Is it because the global recovery is so good?

 

 

                  Dr. Waltraud Schelkle, London School of Economics

 

 

It’s fairly solid now and these interest rates are too low. The rest of the economy is not doing as well in terms of the living standard of ordinary working people that has stagnated for 10 years, while we already speak of some overvalued stock markets. I mean, that then when a central banker should say, ‘it’s probably time to raise interest rates’.

 

It seems almost like Alan Greenspan; always finding a reason why we should not do anything and just sit on his hands. I am genuinely puzzled why we haven’t already started.

 

 

 

 

Watch the interview here: