Posts tagged currencies
(FX) Volatility to Make a Comeback?

I said my peace on what I consider to be the big market stories last week, so I won’t belabour bonds and equities too much this week. FX markets, however, could well be the driver of the NarrativeTM in the next few months, at least judging by the rustling of the grapevine. This story starts with the notion of the “global Fed,” which is not a new idea at all. Fed watchers tend to pivot between two extremes in their analysis of, and forecasts, for U.S. monetary policy. In one end, Fed conducts itself according to the reality of a relatively closed U.S. economy, without regard to the impact of its policy on the rest of the world, and the value of the dollar. At the other end, the Fed acts according to its role as a warden of the global reserve currency, taking into account the impact of its policy on the rest of the world. A more cynical version of this story is the idea that the Fed, in a world of free capital mobility, is constrained by the fact that other major central banks, in economies with large external surpluses, are stuck at the zero bound. This could happen in practice as tighter monetary policy in the U.S. drives the value of the dollar higher and/or leads to an increase in capital inflows. Both likely would drive up the external deficit, which would probably be counterproductive in an environment when the Fed would otherwise want to raise rates to curb inflation pressures.

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Two Questions, 1 & 1/2 Answers

Two questions, at least, are on investors’ mind at the moment. Is the synchronised global upturning turning into a synchronised slowdown? Will the dollar rally be sustained, and if so, will it spark further stress in emerging markets and in the global economy? You would be hard-pressed to argue that the global economy is slowing dramatically, at least based on the most recent headline data. My estimates suggest that global GDP growth was unchanged at 2.9% year-over-year in Q1, thanks mainly to a slight 0.3 percentage point rise in U.S. growth to 2.9%. That said, this number includes the 6.8% headline in China, which no one believes, and we still don’t know what happened in Japan. Finally, this number masks the fact that momentum in Europe slowed across the board. Growth in the euro area is still solid, but it slowed sharply in Q1. And the first indications for Q2 do not promise much in the way of a rebound. After growth of nearly 3% last year, all evidence so far points to somewhat slower growth of 2% in 2018. The picture is even grimmer in the U.K. where growth slid to a five-year low of 1.2% in Q1. Looking beyond the GDP numbers, leading indicators are discouraging, but not yet in panic territory.

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A Chinese Postcard from a grumpy economist

Another start to a new year another bout of anxiety over China, although I concede that the collateral damage on other markets have so far been far modest compared with the panic in Q1 last year. The bogey man is the same as in 2016. Capital outflows are acceleratingcurrency volatility has surged and the once bulging FX reserve coffers are leaking fast. These are ominous signs in a traditional emerging market macro-style framework, but I am not sure that this is the correct prism through which to look at China.

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