Tags: fed | fomc | investors

As Always, We'll Have to Wait and See What Happens …

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Wednesday, 27 Jan 2016 05:50 AM Current | Bio | Archive


The main stock-market trend setter could be the FOMC statement we’ll get this afternoon.

Hopefully, it will tell us about how the Fed is evaluating the path forward for the U.S. economy and how it sees the timing of the process to normalization of its monetary policy.

Anyway, some economists at Goldman Sachs think the Fed will remain cautious in its statement and will not shut the door for a second rate hike in March. Goldman Sachs’ chief economist Jan Hatzius says, on the contrary, the Fed will first have to “ease” before it can attempt a second hike. The dollar must ease too.

Somewhat confusing, isn’t it?

Goldman also predicts the Fed will say it is “monitoring global economic and financial developments,” which is in itself not that surprising after in the Fed’s September 17, 20015 press release, which read: “…This assessment will take into account … readings on financial and international developments. The Committee anticipates that it will be appropriate to raise the target range for the federal funds rate when it has seen some further improvement in the labor market and is reasonably confident that inflation will move back to its 2 percent objective over the medium term.”

Now, if today’s FOMC statement doesn’t give us clarity, then we’ll have to wait until Fed Chair Janet Yellen will give her semi-annual congressional testimonies on monetary policy on February 10 and 11.

In the meatime, we know the December Employment Situation report was another positive one while the Cleveland Fed “Inflation Nowcasting” data gave us the latest updated (January 26) inflation numbers for CPI year-on-year (y/y) at 1.27 percent and Core CPI at 2.08 percent y/y.

About the dollar, we certainly can’t say it’s cheap today, but we also can’t say it’s in the “danger” zone of being way too expensive because when we look at the Real Traded Dollar Index: Broad that uses March 1973 as reference 100, it now trades at 99.395 while it traded in February 2002 at 112.805.

When we look at the Chinese yuan (CNY), we see the currency has appreciated against the dollar by about 20 percent since June 2005.

Last week in Davos, Switzerland, Fang Xinghai, the vice chairman of the Chinese Securities Regulatory Commission said: “A deep depreciation (of the CNY) is not in the interests of China’s rebalancing; a too deep fall would not be good for consumption.”
 
Meanwhile, the Governor of the Bank of Japan, Haruhiko Kuroda, stated China should impose capital controls (just released data show outflows in 2015 amounted about $1 trillion!) to defend the yuan rather than burning through their currency reserves while it could do better by keeping domestic monetary policy loose.

Besides all that and for what it’s worth, we got a rather interesting op-ed in the Chinese daily "People’s Daily Online" titled “Think twice before declaring war on Chinese currency” that came after Georges Soros had said he had “short” sold Asian currencies, which is of course completely legal. The Chines writer bluntly states: “Soros’challenge to the RMB and Hong Kong dollar are doomed to fail.”

I personally wouldn’t be so sure of that.

On the U.S. we read: “Even though the U.S. is trying to reboot its real economy, it is struggling to continue its “re-industrialization”. Its trade balance therefore deteriorated as the economy recovers. The strong momentum of USD against RMB is temporary.”

As always, we’ll have to wait and see what happens …

All that said, I wonder this year will be another important year for the Chinese currency as it has been in 2005 when comments from World Economic Forum in Davos in that year “hinted” the peg of the Chinese currency with the dollar would be broken later that year.

We’ll see if what Mark Twin allegedly said (“History doesn’t repeat itself, but it does rhyme”) applies again this time around.

Etienne "Hans" Parisis is a bank economist who has advised global billionaires and governments on the financial markets and international investments. To read more of his articles, GO HERE NOW.

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As always, we’ll have to wait and see what happens…
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2016-50-27
Wednesday, 27 Jan 2016 05:50 AM
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