Tag: CURRENCY

Dollar Declines as Investors Pull Back from ‘Trump Trades’ Amid Election and Fed Rate Cut Anticipation

Posted on by slightbourne@noblecapitalmarkets.com
Key Points:
– The dollar hit a two-week low, driven by election uncertainty and profit-taking on “Trump trades.”
– Investors anticipate a 0.25% Fed rate cut on Thursday, with further cuts likely in early 2025.
– The Bank of England and other central banks are also expected to ease rates amid market volatility.

The U.S. dollar fell to a two-week low on Monday, with investors taking profits from “Trump trades” ahead of the closely contested U.S. election and an expected Federal Reserve rate cut. The euro gained 0.7% to $1.0906, while the dollar weakened by nearly 1% against the yen to 151.645, and the dollar index slipped to 103.65.

Markets are seeing increased volatility as the presidential race between Democratic candidate Kamala Harris and Republican Donald Trump tightens. Polls show a slight edge for Harris in key battleground states like Nevada, North Carolina, and Wisconsin, leading some investors to unwind dollar positions they had previously built around a potential Trump win. Betting markets have also shifted, with odds for a Trump victory narrowing over the last week.

Kenneth Broux, Societe Generale’s head of corporate research in FX and rates, noted that investors are adjusting positions in response to new polling data, which showed Harris slightly ahead in some swing states. “Markets are very stretched – long dollars, short Treasuries – into the vote tomorrow, so it’s only natural we are adjusting some of that positioning,” Broux explained.

With a potentially ambiguous outcome, traders are also pricing in a high likelihood of post-election volatility. Options markets show increased demand for protection against market swings, with the one-week implied volatility for euro/dollar reaching its highest since early 2023. Implied volatility is also elevated for the Chinese offshore yuan and the Mexican peso, highlighting concerns about trade and economic policy changes following the election.

Alongside election jitters, the Federal Reserve’s policy decision this week is another key focus. The central bank is expected to announce a quarter-point rate cut on Thursday, marking a departure from the larger 0.5% cut implemented previously. CME’s FedWatch tool shows a 98% probability of this smaller rate reduction, with market odds favoring further cuts through early 2025. According to Jan Hatzius, an economist at Goldman Sachs, the Fed’s projected path for rates appears more dovish than current market pricing, with Hatzius suggesting four consecutive cuts in early 2025.

The Bank of England (BoE) is also set to meet this Thursday, where it is expected to implement a 0.25% rate cut amid recent bond market volatility and concerns about the UK’s fiscal policy. Following the Labour government’s recent budget, UK gilts saw a steep selloff, and the British pound briefly dipped before rebounding to $1.29820. Meanwhile, other central banks, including the Riksbank and the Norges Bank, are anticipated to make dovish policy moves this week, with the Riksbank expected to ease rates by 0.5% and the Norges Bank likely to hold steady.

In Asia, the Reserve Bank of Australia is expected to keep rates unchanged at its Tuesday meeting, while China’s National People’s Congress, which convenes this week, is expected to announce further economic stimulus measures.

The interplay between the U.S. election and potential rate cuts from major central banks has intensified uncertainty in the currency markets, as investors monitor for clues on how fiscal and monetary policy shifts will shape the global economic outlook.

US Dollar Sinks to One-Year Low Against Yen Amid Growing Speculation of Aggressive Fed Rate Cut

Posted on by slightbourne@noblecapitalmarkets.com
Key Points:
– The U.S. dollar hits its lowest level in over a year against the yen, driven by expectations of a larger-than-expected Fed rate cut.
– Market pricing now reflects a 61% chance of a 50-basis-point cut at this week’s Federal Reserve meeting.
– This volatility comes as other central banks, like the Bank of Japan and Bank of England, are expected to hold rates, creating a global divergence in monetary policy.

The U.S. dollar has plummeted to its lowest level in over a year against the Japanese yen, fueled by growing market speculation that the Federal Reserve may adopt a more aggressive approach to rate cuts. Following reports from The Wall Street Journal and Financial Times, traders are increasingly betting on a 50-basis-point (bp) cut during the Fed’s policy meeting this week, up from the previously anticipated 25-bp cut. This shift has caused ripples across the currency and bond markets, with investors closely monitoring the broader impact on global markets and the U.S. economy.

The U.S. Federal Reserve’s monetary policy decisions have far-reaching effects, not only on domestic markets but also on global financial stability. As the central bank weighs its options, the potential for a larger-than-expected rate cut is being driven by concerns about weakening inflation data and slowing economic growth. Last week’s softer Consumer Price Index (CPI) numbers added to the narrative that the Fed might be willing to move more aggressively to support the economy, despite earlier hawkish signals.

As expectations for a 50-bp cut grow, the U.S. dollar has seen a sharp decline against key currencies, including the Japanese yen. The dollar fell as low as 139.58 yen during Monday’s Asian trading hours, marking the lowest point since July 2023. This drop reflects the mounting concern that the dollar will weaken further if the Fed makes an aggressive cut, narrowing the interest rate gap between the U.S. and other countries like Japan, which has kept its rates low for an extended period.

Currency markets have been particularly sensitive to central bank actions, and the U.S. dollar’s recent dip is a prime example of this. The divergence in monetary policies between the Federal Reserve, the Bank of Japan (BOJ), and the Bank of England (BoE) has created a complex dynamic. While the Fed is now considering rate cuts to stimulate the economy, the BOJ is expected to hold rates steady at 0.25% at its policy meeting later this week. Meanwhile, the Bank of England is also expected to keep its key rate at 5% after initiating a small rate cut in August.

This growing disparity in interest rates is driving the yen higher, as investors unwind yen-funded carry trades—investments made by borrowing in yen to purchase higher-yielding foreign assets. The narrowing interest rate gap between Japan and the U.S. has caused these trades to lose their appeal, pushing the yen higher and the dollar lower. The broader foreign exchange (FX) market has also seen major currencies like the euro and the British pound rise against the dollar, signaling global uncertainty about the U.S. economic outlook.

The potential for a 50-bp Fed rate cut presents both opportunities and risks for investors. On one hand, lower interest rates could spur economic activity by making borrowing cheaper and encouraging investment. This could provide a boost to stock markets, particularly in sectors like technology and consumer goods, which tend to benefit from looser monetary policy.

On the other hand, a weaker dollar could create challenges for U.S. companies with significant international operations. As the dollar falls, the cost of imported goods rises, leading to potential inflationary pressures. Additionally, for companies that generate significant revenue abroad, a weaker dollar could erode profit margins when converting foreign earnings back into U.S. dollars.

As the Federal Reserve’s September meeting approaches, all eyes will be on how policymakers navigate this delicate balance. A 50-bp cut, if it happens, would represent a significant shift from the Fed’s earlier signals of a more gradual approach to rate reductions. Traders are pricing in a 61% chance of this larger cut, compared to just 15% last week, highlighting the rapid change in market expectations.

Meanwhile, the global financial system will continue to adjust to the diverging monetary policies of major central banks. Investors, particularly those involved in currency trading or holding international assets, will need to remain vigilant as the Fed’s decision could prompt further volatility across markets.

In the near term, the U.S. dollar’s performance against major currencies will serve as a key indicator of investor sentiment. If the Fed opts for a less aggressive cut, the dollar could regain some strength. However, if the central bank signals a prolonged period of rate cuts, the dollar’s weakness may persist, especially against currencies like the yen and the euro, which are being supported by their respective central banks’ policies.

Gold Could Get Much Stronger from BRICS Plans

Posted on by phoffman@channelchek.com

The BRICS Currency Project Picks Up Speed

On Friday, July 7, 2023, news broke in the financial market media that the “BRICS” (that is, Brazil, Russia, India, China, and South Africa) will implement their plan to create a new international currency for trading and financial transactions, and that this new currency will be “gold-backed”. Most recently, on June 2, 2023, the foreign ministers of the BRICS – as well as representatives from more than 12 countries – met in Cape Town, South Africa (interestingly at the “Cape of Good Hope”). Among other things, it was emphasized that they wanted to create an international trading currency. Undoubtedly, this is an undertaking that could have consequences of epic proportions.

After all, the BRICS countries represent about 3.2 billion people, approximately 40 percent of the world’s population, with a combined economic output nearly the size of the economy of the United States of America. And there are also many other countries (such as Saudi Arabia, United Arab Emirates, Egypt, Iran, Algeria, Argentina, and Kazakhstan) that might want to join the BRICS club.

The goal of the BRICS countries is to reduce their economic and political dependence on the US dollar, challenging “US dollar imperialism”. To this end, they want to create a new international currency for commercial and financial transactions, replacing the US dollar as the means of transaction unit.

The reason is obvious. The US administration has on many occasions used the greenback as a “geopolitical weapon” and engaged in a kind of “financial warfare”: Washington sanctions enemy countries by denying them access to the US dollar capital market, but above all, it shuts them off from the international US dollar-centric payment system.

The freezing of Russia’s currency reserves (the equivalent of almost 600 billion US dollars is currently at stake) has set off alarm bells in many non-Western countries. It has reminded a number of them that holding US dollars comes with a political risk. This, in turn, has prompted many to restructure their international foreign reserves: holding fewer US dollars, switching to other (smaller) currencies, but above all, buying more gold.

But how might the BRCIS manage to swim away from the US dollar? While no details are available yet about how the new BRICS currency might be structured, it should not stop us from speculating about what lies ahead.

The BRICS could establish a new bank (the “BRICS-Bank”), funded by gold deposits from BRICS central banks. The physically deposited gold holdings would be shown on the asset side of the BRICS bank’s balance sheet – and could be denominated, for example, “BRICS-Gold”, where 1 BRICS-Gold represents 1 gram of physical gold.

The BRICS-Bank can then grant loans denominated in BRICS-Gold (for example, to exporters from BRICS countries and/or to importers of goods from abroad). To fund the loans, the BRICS-Bank makes a credit contract with the holders of BRICS-Gold: The holders of BRICS-Gold agree to transfer their deposit to the BRICS-Bank for, say, one month, or one or two years, against receiving an interest rate. What is more, the BRICS-Bank, and it can also accept further gold deposits from international investors, who can hold (interest-bearing) BRICS-Gold deposits this way.

BRICS-Gold could henceforth be used by the BRICS countries and their trading partners as international money, as an international unit of account in global trade and financial transactions. Incidentally, the new de facto gold currency would not even have to be physically minted but could be and remain an accounting-only unit while being redeemable on demand.

The exporters from the BRICS countries and the other member countries would, however, have to be willing to sell their goods against BRICS-Gold instead of US dollars and other Western fiat currencies, and the importers from the Western countries would have to be willing and able to pay their bills in BRICS gold.

How do you get BRICS-Gold? Those demanding BRICS-Gold must either get a BRICS-Gold loan from the BRICS-Bank or purchase gold in the market and deposit it with the BRICS-Bank or a designated custodian, and the gold deposit is then credited to his account in the form of BRICS-Gold.

For example, in payment transactions, the goods importer’s BRICS-Gold deposits (held, for example, at the BRICS-Bank) are credited to the account of the exporter of goods (also held at the BRICS-Bank or at a correspondent bank or gold custodian).

However, the transition, the use of BRICS-Gold as an international trade and transaction currency, would most likely have far-reaching consequences:

(1.) It would presumably lead to a (sharp) increase in the demand for gold compared to current levels, with not only gold prices measured in US dollars, euros, etc. but also in the currencies of the BRICS countries increasing (substantially).

(2.) Such an increase in the gold price would devalue the purchasing power of the official currencies – not only the US dollar but also the BRICS currencies – against the yellow metal. Also, the prices of goods in terms of the official fiat currencies would most likely skyrocket, debasing the purchasing power of presumably all existing fiat currencies.

(3.) The BRICS countries would build up gold reserves to the extent that they run, or will run, trade surpluses. They would presumably be the winners of the “currency switch”, while the countries with trade deficits (first and foremost, the US) would lose out.

BRICS official gold holdings, in billion US dollars, Q1 2023

 Source: Refinitiv; The BRICS’ gold reserves amounted to 5452.7 tons in the first quarter of 2023 (market value currently around 350 billion US Dollars).

These few considerations already show how disrupting the topic of “creating a new gold-backed international trading currency” could be: The BRICS could well trigger landslide-like changes in the global economic and financial structure. Still, it will be interesting to see how the BRICS countries intend to proceed at their August 22-24 meeting in Johannesburg, South Africa.

About the Author:

Dr. Thorsten Polleit is Chief Economist of Degussa and Honorary Professor at the University of Bayreuth. He also acts as an investment advisor.