This week, in an address to the National Association for Business Economics, US Federal Reserve chairman Janet Yellen admitted that perhaps the Fed has "misspecified" its inflation models and "misjudged" key variables such as unemployment and inflation expectations. She and her board of governors have acknowledged the current debate is to whether low inflation is a structural or temporary phenomenon, seeing as their preferred measure, core personal consumption expenditure, has been below their 2 per cent target almost every single month since September 2008.
Unsurprisingly, they still concluded their current policy is correct and that the effect would fade over time; it "would be imprudent to keep monetary policy on hold until inflation is back to 2 per cent". Hence more gradual, tiny rate rises. This sent yields on two-year US Treasury Notes to 1.47 per cent, their highest since November 2008 and flattened the yield curve between two- and 10-year Treasuries to November 2007 levels.
Her comments strengthened the US dollar this week, with moves accelerating following the previous two in some currencies, most notably the ones we are covering today (which have lost, as at the time of writing, between 3 and 5 per cent). We look to see whether these moves are truly significant or part of the natural ebb and flow that headline writers abhor.
The Japanese yen, a safe haven in stormy markets for years, started the month at its strongest in almost 12 months at 107.30 yen per greenback; today it hit 112.95. Look closely at the chart and you can see this type of move on several occasions since December’s high. It has retraced half of this year’s drop and remains well within a descending channel. Therefore we shall conclude that, while newsworthy, and possibly linked to jitters over North Korean antics, it’s business as usual.
The Swiss franc is a troublesome beast – for years the Swiss National Bank has battled to curb its strength and protect the economy and its exporters. This week the Geneva-based World Economic Forum ranked Switzerland as the most competitive economy for the ninth year running – because or despite the currency’s strength. Against the euro it’s at its weakest since the currency peg was abandoned abruptly early in January 2015. Against the US dollar it’s probing the highs at the Fibonacci retracement resistance at CHF0.9775, well under the down trend line, therefore corrective price action rather than a change in trend, for now.
The Chinese yuan is a managed currency. From January 2014 China planned to move it off its strongest ever level, but things spun slightly out of control at the year-end. Subsequent appreciation from 6.95 to 6.45 has corrected about half of previous losses, forming a massive hammer candle on the monthly chart, a juddering full stop. We expect it to weaken until the end of the year.
Readers have asked about the Turkish lira, which again is a managed currency. For the decade to 2011 it held two standard deviations around a mean at 1.4650 to the dollar, but keep in mind this was against a background of perennial depreciation. At its weakest ever in January (3.9400), the corrective drop in price recouped half the losses since 2016. Like the yuan, expect it to lose value for the rest of this year.
