Weaker Greenback Leaves Door Open for the Fed - Scotiabank
Derek Holt, Research Analyst at Scotiabank, suggests that there are thought to be two main impediments to the Fed hiking in the near-term including the higher odds of a hike this week than markets are pricing.
Key Quotes
“One is that the Fed has allegedly provided no such guidance. In any event, one of the Fed’s most consistently articulated points has tended to be that officials think markets have under estimated the tightening cycle relative to its guidance. It may also be that the Fed feels less need to hand-hold than it did going into the first hike ever witnessed by a generation of younger traders.
The second suggested impediment is the USD. The measure of the currency that the Fed considers is the broad dollar index. The Greenback has depreciated since its peak in mid-January when it was benefiting from safe haven flows in part over concerns about China’s economy. Now the broad dollar — up to last week’s latest estimate from the Federal Reserve at least — has fallen back down to where it was before the Federal Reserve hiked in December.
Now you might suggest that the issue is that the USD would go on a tear if the Fed hiked. There are two counterpoints. One is to reemphasize that this has not really happened in any sustained way since the Fed began to hike in December. Two is that China’s capital account outflows are gradually cooling in part as authorities reclaim somewhat of an upper hand over markets after frankly mismanaging currency policy since last summer, and in part because seasonal influences on China’s capital account have abated (eg. The $50k per head conversion limits that get reset January 1st each year). Three is that other crosses like USDCAD have also restored a stronger CAD profile reflecting a combination of stronger commodity prices, the likely end to a BoC easing cycle, pending fiscal policy measures to support growth, and data upsides. These are not inconsequential arguments; the yuan has a 21.6% weight in the broad dollar index, which is higher than the euro’s 16.6% weight and both CAD and the Mexican peso have 12% weights.”
(Market News Provided by FXstreet)
