Recent Articles

1st February 2016
A case for a more dovish Fed. More dovish than you have just imagined


Last week the Fed left interest rates unchanged, as was broadly expected. Current market expectations remain slightly skewed to higher rates by the end of the year, which is consistent with all the previous messages about ‘gradual policy normalisation.’ However, a number of economic indicators are pointing to the Fed being more dovish going forward.


The Fed has a dual mandate: to ensure that inflation remains close to the target of 2% and unemployment is consistent with its long-term normal rate. Last week, the numbers for the normal unemployment level were updated from 5.2-5.5% to 4.9%. (The normal rate of unemployment is the threshold, reduction below which causes higher inflation.) This lowering of the threshold unemployment rate, highlights some dovishness on the side of Fed, and conveys its worries about other indicators of the job market.


When looking at the headline indicators, the job market appears to be healthy. Indeed, the...

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25th January 2016
Fed to adopt cautious stance on policy

Looking forward at the week ahead, Wednesday’s Fed meeting jumps out as a key focal point for the currency markets. Following the decision to hike rates by 25 basis points in December, the consensus forecast [unsurprisingly] is for the FOMC to keep policy unchanged following this week’s meeting. However, the main dilemma facing economists is regarding the Fed’s outlook for policy in 2016.


After the Fed signalled their intentions last year to raise rates, expectations ranged between two and four 25 basis point hikes during 2016. These forecasts have already been scaled back considerably (futures markets are only pricing in a 71% chance of a 25bps hike by the end of 2016) although the Fed are yet to officially confirm their stance and projections.


In the absence of a scheduled press conference and updated growth / inflation forecasts, the focus will be on the accompanying statement and the minutes from the meeting...

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18th January 2016
What kind of risk-off is this?


Last week, risk-off sentiment kicked in the markets: treasuries yields fell, stock markets went through significant turbulence, oil hit new lows, and gold started gaining. On the currency front, the USD strengthened against most currencies with the exception of JPY and EUR. These two currencies are normally expected to appreciate during the risk-off, but interestingly, EUR in fact was close to being flat, while other 'usual suspects' for appreciation - namely CHF, SEK, and GBP - lost to USD. We argue that each risk-off episode is different, and therefore the set of safe haven currencies is expected to be different. Research suggests that this may be defined by the overall risk levels, as measured by the VIX.



With oil prices tumbling below $29/bbl, Chinese markets crashing and sterling trading at its 5-year lows, are we in risk-off mode?



On the one hand, it does not seem so. Firstly, oil is falling because...

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