Let’s put this into a different perspective. If we go back to roughly 2014, this was when the Federal Reserve first started to provide guidance of a potential change for higher interest rates in the United States. The first move higher, however, in fact didn’t occur until towards the end of 2015. So in reality, the Federal Reserve went up the lift very slowly but today, markets are ambitiously expecting the same central bank to jump down the escalator?
After close to 10 increases in US interest rates over the past couple of years at a gradual pace, I find it hard to believe that it will be that easy for the Federal Reserve to do two things - wave the flag and surrender, then put the car into reverse gear and accelerate downhill.
Setting the tone
Make no mistake, today’s Federal Reserve decision and the tone that it sets in its statement runs the risk of dictating how financial markets will perform into the next decade.
If the Federal Reserve does obey market expectations and issues the requested guidance that U.S. interest rates will be lowered, this will flatten forecasts for the U.S. dollar. A dollar that is anticipated to slide downhill on lower US interest rate expectations means a stronger euro, yen and pretty much everything else!
Where a weaker USD will be warmly applauded and even possibly welcomed with a standing ovation is in emerging markets. The prospects of foreign flows returning into emerging markets would mean at the very least a stronger Malaysian ringgit, Indonesian rupiah, Philippine peso and Chinese yuan. Stretching further than the Asian region, the feelgood factor of a weaker U.S. dollar would also mean good news for the likes of the South African rand, Russian rouble and even further afield, the Mexican peso.
U.S.-China trade disputes have been a very long-winded movie for financial markets. Think of it as a Marvel movie, in which trade tensions are very much the villain of the story for market sentiment.
This is why investors are excited at the news that U.S. President Donald Trump and Chinese President Xi Jinping will have an “extended” meeting at the G20 summit in Japan later in June. Viewers want a happy ending to a very long story and are hoping that Captain America and Iron Man will come to the rescue and save investors from the persistent villain - the trade tensions.
The feel-good factor stemming from anticipation that there will hopefully be a resolution has fuelled a rally across emerging market currencies on Wednesday morning. The Korean won, Philippine peso, Indonesian rupiah, Chinese yuan and Malaysian ringgit are all stronger against the greenback.
To read more market analysis from FXTM please visit: FXTM.
Disclaimer: This written/visual material is comprised of personal opinions and ideas. The content should not be construed as containing any type of investment advice and/or a solicitation for any transactions. It does not imply an obligation to purchase investment services, nor does it guarantee or predict future performance. FXTM, its affiliates, agents, directors, officers or employees do not guarantee the accuracy, validity, timeliness or completeness of any information or data made available and assume no liability for any loss arising from any investment based on the same.
Risk Warning: CFDs are complex instruments and come with a high risk of losing money rapidly due to leverage. You should consider whether you understand how CFDs work and whether you can afford to take the high risk of losing your money.
Any opinions expressed here are the author’s own.
Disclaimer: This article is provided for informational purposes only. The content does not provide tax, legal or investment advice or opinion regarding the suitability, value or profitability of any particular security, portfolio or investment strategy. Read our full disclaimer policy here.
© Opinion 2019