Stories by the author
The Federal Reserve met market expectations fully. It upgraded its assessment of the economy, recognized that the near-term risks had diminished, and remained committed to normalizing monetary policy. There was one dissent from the steady stance, and it the KC Fed President had already tipped her hand.
Our informal and simple model for the Canadian dollar has three variables: oil, interest rates, and general risk environment. Over time, the coefficient of the variables can and do change.
Of the three variables, the general risk environment is the most supportive of the Canadian dollar. Between the BOJ and ECB more than $150 bln a month of central bank, credits are being created. This is one of the key factors driving interest rates down in Europe and Japan.
This Great Graphic was tweeted by Alan Kruger (@Alan_Kruger). Drawing on official data and the Atlanta Fed's GDPNow tracker for Q2 GDP (2.4%), it shows the current business cycle in the context of a four earlier cycles.
Until now, the recovery from the Great Financial Crisis was the weakest from the post-WWII last four contractions. However, as Kruger points out assuming that the Atlanta Fed's GDP tracker is accurate, this dour assessment will no longer hold. It will surpass the recovery from the end of the tech bubble at the start of the century.
As uncertainty over Japan's fiscal stimulus roiled the yen and domestic equities, Prime Minister Abe was forced to announce his fiscal intentions earlier than he initially intended. The JPY27 trillion (~$265 bln) package.
The details are far from clear, which may help explain why the dollar is in the middle of the two yen range (~JPY104.65-JPY106.55). Note the high for the week was set on Monday near JPY106.70. An unspecified part of the spending will be included in fall supplemental budget, which Japan regularly introduces.
The Federal Reserve's two-day meeting concludes today. There is little doubt that it will stand pat. There is not press conference afterward, so the statement is the only thing investors will get. The statement is important. We argue that the FOMC statement is the clearest expression of the views of the Fed's leadership. The minutes are more comprehensive they dilute the signal from the Fed's leadership, and it conflates the difference between voters and non-voters and between the Governors and regional Presidents.
The health of European banks has reemerged as an important market factor this year. The IMF warned that the greatest risk to global financial stability stems from three European banks. Branches of two European banks failed the Federal Reserve's stress test. In addition, this does not even mention the Italian banks, and especially the oldest bank in the world, Monte Paschi, which has been the immediate focus.
The strength of the Japanese yen is the main development in the foreign exchange market today. It has gained nearly 1.5%, as short-term participants grow skeptical of the kind of stimulus that had driven the yen around 7.5% lower between July 8 and July 21's six-week high. The pendulum of market sentiment has swung wildly.
Today's 2.5% fall in the September light sweet crude oil futures contract extends the decline that began on June 9. It is the third consecutive loss and the fifth loss in the past six sessions. There are two important points to make that this Great Graphic from Bloomberg helps illustrates.
The results of the latest stress tests on European banks are expected to be released at 10:00 am CET (5:00 am ET). The tests cover a little more than 50 of Europe's largest banks, with around 80% domiciled in the Eurozone.
The banks will be tested under two scenarios. The first scenario is EC's economic forecasts made last year. That is the baseline. The second is a stress scenario developed by the European Banking Authority (EBA) and the European Systemic Risk Board. This scenario includes shocks in numerous markets.
What promises to be a busy week has begun off slowly. The US dollar has been largely confined to its pre-weekend ranges against most of the major currencies.
EM ended the week on a soft note, as the dollar reasserted broad-based strength against most currencies. The FOMC meeting this week could see the Fed push back against the market’s dovish take on policy, in which case EM would be likely to remain under pressure.
Contrary to conventional wisdom, we think monetary policy remains an important variable for asset prices. Interest rates and foreign exchange are two dimensions of the price of money. There is a relationship, even if it is not linear or temporally consistent.