Tough week to have to raise rates, but I think Yellen will hike. It has been 9.5 years since the last hike in June 2006. The FOMC (Papa Gruff) has broad shoulders and can afford to get rates officially off the zero bound. As others have pointed out, much of the initial move is already factored into Fed Fund futures (approx. 75% at time of writing). The ECB (Baby Gruff), despite their most recent disappointment (bridge overload), remains in QE infinity mode, as does the BOJ (Mama Gruff). 12-18 months out EUR/USD at 0.95 and USD/JPY 140.00 are not out of the realm of possibility if both goats were to sit out an entire monetary cycle.
Much of the what has been playing out in the markets since the 2013 Taper Tantrum is grounded in divergent central bank policies. The DXY is near its highs. As fellow peanut gallery member dyer440 noted in his most recent “oil gambler” piece, oil has a very high statistical inverse correlation to the USD (75% over the last decade). All former lottery winner countries are getting taken to the mat quicker than a UFC featherweight title fight. The currencies moves have been extreme to the downside; BRL, ZAR, MYR, NOK, CAD, and AUD, all cannon fodder until further notice.
PBoC (Troll) has been under the bridge for a long time. The Chinese troll is not scary just because of his size in terms of dwindling appetite for iron ore and other base metals. Monetary policy could not be effectively managed in a fully closed system, but things are changing rapidly. I wrote a brief note Nov. 30th on the most recent decision by the IMF to include China’s Renminbi as a component in the Special Drawing Rights (SDR) basket. China is joining the easing party. Having guided the Yuan to a 4 1/2 year low (spending nearly $700bln of their reserves to keep the pace “measured”), bigger moves are afoot. PBoC signalled its intent last Friday to change the way it manages the Yuan’s value and feel it is better measured against a baskets of currencies (much like the SDR they just got added to/ qualified for). The timetable is unclear with respect to implementation. This news falls well short of abandoning the loose peg to the Greenback, but all should take note, the Troll is not slumbering. JCGComments »