How many times, and for how long have you been told, that interest rates must go up? Rather like the boy who cried ‘wolf’, I’d suggest. Other than basket cases such as Argentina, which recently raised its benchmark rate three times to 40.0 per cent a year, the US Federal Reserve stands alone in raising rates in baby quarter point steps, the target rate currently 1.75 per cent.
On Tuesday, new Fed chairman Jerome Powell in a speech noted, "I do not dismiss the prospective risks emanating from global policy normalisation". The reason his team are so confident is that eventually inflation is getting close to their target rate of 2 per cent. Core PCE, their preferred measure, released last week at 1.9 per cent is the closest it’s been (bar March 2012) since October 2008. Nearly a decade, but getting there. Consumer price inflation was 2.4 per cent in March so the Fed funds target is a negative rate of return. Hmm.
Since President Trump took office in January 2017, the US dollar index weakened steadily for all bar the last three weeks; this recovery has been blamed on the interest rate outlook. Raising rates started in 2016 from a mere 25 basis points, and only now the US dollar strengthens; just not joined-up thinking. The question today is: has the trend changed or are recent moves a blip?
Starting with sterling, where everything bad is blamed on Brexit and anything good is an aberration, technical analysis comes down quite clearly on the side of a correction. Although the neat trend channel has been broken, the fact we stalled at 1.4400 is not entirely surprising as this is the mean regression since exchange rates were floated in the early 1970s. We’ve retraced a Fibonacci 38 per cent of the post-referendum rally and are poised on the 200-day moving average. Therefore, well within traditional parameters of swings and roundabouts. We expect the pound to stabilise somewhere between current levels and the 1.3200 area.
Across the English channel the chart of the euro against the US dollar is similar to cable’s, although the recent sell-off has been less extreme, from a rally that started fractionally earlier. While well above the 38 per cent retracement level, we are currently trading under the 200-day moving average and the 50-day one has started turning down. The three black crow candles suggest there is a chance of another small drop to 1.1700 where basing activity is expected to start.
Over to the Swiss franc, which is trading close to some of its weakest levels versus the US dollar in three years. Music to the Swiss National Bank’s ears because its spent years fighting to stop its currency appreciating.
And finally, the Chinese yuan, which slowly and carefully is being turned into something more international as the world’s second-biggest economy seeks a role at the top table. The onshore yuan has weakened for three consecutive weeks, tentatively breaking out of this year’s tight range. Keep this in mind as it’s important: one gets lulled into a false sense of security when markets get trapped in tight ranges. The difference here is that the yuan kicked off this move close its strongest ever level – 6.04 to the US dollar in 2014. A turn in trend that suits when in the middle of a trade war.
