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Dollar Rises on Expectations of a Rate Hike

Unsurprisingly, politics continue to dominate the headlines in the financial press. Whether its Brexit, Clinton vs. Trump, or Euro Politicians debating their role in shoring up the European banking sector, market commentators have had plenty to discuss. However, we shouldn’t forget that there are other factors which influence markets and the growing belief that the Fed will hike rates before the end of the year is helping fuel the recent advance in the dollar.


Looking at the chart below, there is a clear relationship between the dollar index (red) and expectations for Fed monetary policy. Back in February, expectations of a Fed rate hike fell sharply after Yellen delivered what was perceived to be a surprisingly dovish speech. In turn, the dollar also fell sharply on a trade weighted basis.


Chart 1: Dollar Index vs Probability of a Fed Hike in 2016




More recently, there has been a growing perception that the Fed...

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What does Brexit mean for Cable?

Currency markets were left reeling on Friday after a sharp move in Asian trading saw Cable smash recent lows to touch a new level of 1.15.  Media reporting sensationalised the event as a ‘flash crash’ caused by ‘rogue’ algorithms or a possible ‘fat-finger’ error.  However,  traders were  left with the realisation that what actually happened was more likely caused by significant uncertainty leading to a limited volume of buyers in the market willing to meet sellers demand.  After a short period,  buyers saw value in the currency and entered the market. The pair recovered to 1.24, although overall the week was a fairly brutal one for sterling, dropping 4.3%.


The primary driver for the move was fears around ‘Brexit’.  Many investors are left asking the question—how low could sterling actually trade against the greenback? 


The context  of this discussion is one in which GBP already looks cheap against the dollar on fundamental...

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Is the Deutsche Bank Crisis a Danger for the Euro?

Coming from the position of the largest bank in Europe in the 1990s, Deutsche Bank can’t even make it to the top 15 anymore. The bank has been struggling since 2006 with its low profitability – its return on equity has lagged below the cost of capital for many years, meaning the shareholder’s value is effectively beyond destroyed – but the recent demand from the US Department of Justice to settle a $14bn probe into mis-selling of mortgage securities has left the bank’s shares trading at the lowest level in three decades (see below) and exposing the need to raise more capital. Last Thursday, it was reported that major hedge funds and investors are pulling capital out of DB, leading to even greater concerns about its stability. Although we’re already seeing signs that the fine with the DoJ will be settled for a much smaller amount, there are still many...

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