Global exchange rate: as the increase in fed rates will affect the Russian currency

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The increase in dollar rates would result in a return of capital in the United States. This can lead to the weakening of the ruble, but the effect will be mitigated due to the relatively low dependence of Russia on external financing

For three months, from mid-November 2016, and currency speculators with the gambling casino goers keen to play a carry trade on the ruble against the dollar and the Euro. The Russian ruble since the beginning of 2017 entered the top three most popular currencies among global players, ahead in its growth against the dollar and the Brazilian real and South Korean won. And even the declared by the Ministry of Finance, the currency is unable to reverse the trend, because there are only two main factors affecting the ruble exchange rate: oil prices and the difference in interest rates. All the rest of the market pointedly ignores. And if a foothold above $55 crude oil is the main stabilizing factor for the ruble, the February decision of the Bank of Russia and the fed to leave its rate unchanged to retain the appeal of the game in the carry trade. And because of the Central Bank in its press release expressly stated that the potential reduction in the key rate in the first half of 2017 has decreased, particular importance is acquiring fed policy.

The Restoration Of America

The Russian currency market practically ignored the speech of the fed Janet Yellen before the Senate banking Committee, and in vain. The tightening of monetary policy in the United States threatens not only the global bond market, but maybe “one day” to stop the carry trade in the ruble and to expand this growing trend 180 degrees.

1 February Janet Yellen took a neutral position concerning the further actions of the regulator due to uncertain policies of the new administration, but now the fed announced the policy of raising rates regardless of the future trade, industrial and fiscal policies of the White house. “Significant progress in the us economy is the driving force of monetary policy,” said Ms. Yellen, responding to questions from senators.

Such statements are very different from the cautious tone of last year’s performances when the fed had to back down and postpone a series of rate hikes. This choice was determined not only by labour-market insecurity and uncertainty in economic growth, but also the imbalances of the global economy and attempts at competitive devaluations by the countries — trading partners of the United States.

Now the fed acknowledges the improving sentiment and growing confidence among consumers and businesses. Although now we can only guess, as promised by President trump incentives affect economic growth, a certain euphoria observed among the business elite, and on wall street, where stock indexes are rewriting historical highs. The improvement in business sentiment may lead to increased investment activity and employment growth. But at the same time increase the risk of inflation. Latest data show retail sales growth, and the increase in the consumer price index. In this case, the so-called demand-pull inflation (inflation of demand) caused by increase in aggregate expenditure in the economy, including private consumption, and growth capital investments. The unemployment rate in January was 4.8%, annual inflation came to 2.5% and the index of personal consumption expenditures (PCE price index), which is now key for the fed indicator, has increased over the year by 1.6%.

And these circumstances make the inevitable rate hike in the first half of 2017. Most likely, it will happen on may 3 at the regular meeting of the Federal open market Committee of the fed. The head of the Federal reserve in testimony before the senators said that he considers “unreasonable” to delay the increase in the base rate. The backlog from rates of inflation bad for the economy. If you then have to rapidly raise rates, it can derail the financial markets and again fall into recession.

In fact, the fed announced the launch of a countercyclical monetary policy when the interest rate increases will keep the economy from overheating. It is important that the fed begins to act like a normal national Central Bank, not as the centre of the world’s reserve currency. Existing imbalances in the global economy and the interests of participants in international trade are likely to be to some extent ignored, despite the fact that the dollar accounts for up to 85% of transactions globally and without exception, all financial and commodity markets, where operations in dollars, are interrelated.

“We share the objectives of the U.S. government and must cooperate constructively to ensure a strong, stable US economy and financial system,” Yellen wrote, commenting on the fed’s part in the development of international banking rules that will contribute to financial stability and competitiveness of American companies. Looks like trompowsky slogan America the first become popular among monetary authorities.

The flight from the rouble

Now back to the situation on the currency market and, in particular, to the quotations of the dollar/ruble. Higher interest rates on dollar instruments (LIBOR) combined with expectations of further growth in yields of US Treasury bonds reduce attractiveness of operations carry trade for speculators. Since the game is in the “strong” ruble lasted long enough, the players may start to take profits and reduce long positions in the ruble against the dollar, which at the first stage can be a stabilizing factor for the Russian currency, but then, as the fed raising interest rates that could cause another weakening of the ruble.

While we are still lucky in comparison with most developing countries, because the increase in dollar rates and a General increase in investment in the us economy will cause global capital flows towards the United States. The volume of floating capital may reach trillions of dollars. Russia is now much less dependent on external funding, but peripheral debt markets, stock markets and most currencies will be under pressure in the second half of 2017, when the global financial system will begin to live with expectations following the fed’s decision about raising rates.

But the danger of the growth rates is now not the only thing that worries investors. There is also the risk that the fed will begin to reduce your balance, which is due to past policies of quantitative easing and bond-buying have accumulated assets worth $4.5 trillion. This can have a far greater negative effect on the markets than even three times increase in rates in 2017.

However, Yellen hastened to reassure senators (as well as market participants), saying that the reduction of investments in bonds will begin only when the monetary authorities are convinced “that the economy is growing steadily, and the rate of Federal funding has reached sufficient levels, allowing to react to the slowing economy by lowering rates.” Translated into ordinary language this means that the first rate exceeds 2%, which will not happen before the first half of 2018, and only then the fed will start to reduce your balance. Yellen could not avoid in his speech to the economic uncertainty in connection with the actions of the new administration, specifying among the causes of the “possible change in fiscal policy and other economic policies of the United States, the future of productivity growth and developments abroad.”

Probably, this uncertainty will be the main limiting factor for the fed, forcing the regulator to move gradually, waiting for the results of the previously performed actions. But the lungs of earnings from financial players soon will be, the risks increase, including for the ruble.

The authors ‘ point of view, articles which are published in the section “Opinions” may not coincide with ideas of editorial.

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