news archive

Dollar rises as Yellen hints at tighter policy

Last week, Fed officials revised their median forecasts for the Fed Funds rate in December 2015 from 0.75% to 1%. Meanwhile, the median forecast for December 2016 was revised from 1.75% to 2.25%. In this week’s edition of Risk Insight, we take a closer look at what this and George Osborne’s UK budget means for the GBP/USD exchange rate.

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The Yuan and FX Volatility

The Chinese central bank widened the Yuan’s trading band on Saturday. Could increased USDCNY volatility lead to a more generalized Volatility spike?

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Is the emerging market turmoil a cause or a consequence of financial instability?

The shift of capital from high-volatility emerging currencies to low-volatility developed currencies stirred panic in financial markets as concerns over economic recovery materialised. However, was the emerging market turmoil a cause or a by-product of financial instability? More importantly, will the volatility in the emerging market currencies spill-over to the West and destabilise the economic recovery?

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Is the euro rally about to run out of steam?

In our view, a valuation ‘premium’ on the euro (against both the USD and GBP) is appropriate, due a combination of fundamental and monetary factors which support the single currency. However, we recognise that this valuation premium is limited, and from a historical perspective, we may be approaching this limit… .

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Going forward…

Mark Carney and Janet Yellen have embarked on Round 2 of Forward Guidance with some interesting differences in their respective approaches. What are the implications for GBPUSD?

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The underwhelming US recovery continues to weigh down the USD…

The US is now into the 5th year of the slowest economic recovery in modern history. In the first four years of the recovery, we have yet to see a year-over-year economic growth rate in excess of 2.8% (which was achieved in 2010), and the average annual growth rate since 2010 has been a distinctly unimpressive 2.25%.

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Will the Emerging Market Crisis Endanger the Economic Recovery?

Perception changes quickly in the financial markets. It was not so long ago that emerging markets were being hailed as the saviours of the global economy, their vibrant, high-growth economies set to drag the sluggish, over-leveraged ‘advanced’ economies out of the post-crisis quagmire of economic stagnancy.

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Is the dominance of the USD as a reserve currency in question?

“Printing a reserve currency to pay for net imports is akin to owning an international ‘printing press’, the use of which causes net global monetary inflation and, by association, some degree of eventual, realised price inflation.”
Belgian economist Robert Triffin

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Sterling approaches a tipping point…

“For 10 years now the pound has been clearly overvalued… and is now some 12% above fair value. As with the overvaluations of the pound at the start of the 1980s and the 1990s, the exchange rate has proved a silent killer for British industry.”
Larry Elliot, ‘How the strong pound killed British industry’
The Guardian, October 2006

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Sterling’s Market Momentum

GBP’s strength continues to win over skeptics – but is the currency beginning to overshoot the underlying economic story?

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