Inflation Could Splinter FX Gains - Nomura
Bilal Hafeez, Research Analyst at Nomura, suggests that the core
inflation is on the rise in the US, which may mean the Fed is falling
behind the curve, and oil prices have been having a major impact on CPI
measures that central banks target.
Key Quotes
“So
it comes as no surprise that Inflation has been slowly infecting FX
markets over past year. Indeed, the real rate differential and the
dollar have been tied more closely together than most other measures.
Perhaps
more interesting is how developed currencies fare when inflation is
incorporated. Ranking currencies by their two-year yields, we find the
usual suspects, AUD and NZD, at the top of the table, and CHF and SEK at
the bottom of the table. But when we adjust these yields for expected
inflation (this time using analysts’ forecasts), we find some major
changes in rankings. The most significant changes are NOK, which plunges
from 5th place to the bottom of the table, and CHF, which jumps from
bottom to 4th.
This suggests that the rally in “risk” currencies
seen over the past week could start to splinter, with AUD and NZD
continuing to perform, while others like NOK start to lose steam,
especially if oil prices stabilise.”
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