On Monday $ fell to its lowest level in a basket of currencies bucking its recent trend as investors have grown nervous ahead of US inflation data with other Central Banks like ECB/ BOE etc adopting a more hawkish stand. This will determine the extent of the next Fed rate hike.
So far the US economy exhibiting resilience with multiple data points pointing towards a probable softer landing than a recession has helped the dollar index strengthen.
India has been bucking the trend with the Rupee depreciating against the dollar on account of global sentiments but strengthening against other currencies. The rupee’s ability to stem the fall with RBI looking at holding the figure of 80 seems to be paying off along with other
Factors in India’s favour. India appears to be becoming part of the bond market and is on the way to developing independent weightage in the MSCI EM index. Why is this happening? What is the role of the central bank in this ?
So let’s look at a few factors that determine currency movement- political stability, economic stability, inflation, interest rates, debt & its sustainability, economic indicators and last but not the least, future outlook. Markets are always forward looking so the outlook is v
Important in determining currency movements. Since, currency movements are determined by CBs, their ability/ inability to tackle any crisis, the confidence/expectations of investors in them/ their performance in vis a vis their peers.. these factors are important.
It’s simple- CBs inability to handle inflation perpetually leads to devaluation. Persistent devaluation in turn spikes inflation. (We saw this in AU).
Rising rates + high inflation +high growth means positive fx. We are seeing this playing out slightly in our context atm. Rising rates + high inflation + lower growth - negative for fx (Eurozone). This problem gets compounded if the lower growth turns negative ( Germany)
For an export based economy, currency depreciation in fx is v good for economic growth ( China model) but for an import based economy, the same is inflationary. (USA, EU supply chain import issues). However, any model has its consequences. For example, in falling Fx, inflation
Spikes, demand collapses, disposable incomes collapse, pushing the economy into a vicious cycle. Persistent fall in demand leads to deflation. High inflation is dangerous as it details growth, eats up disposable incomes but deflation destroys wealth!
Hence, just like seasons, the economy too goes through spring, summer, autumn and winter. Sometimes the rains are harsh, sometimes there is drought and it needs intervention.
One of the popular methods to cool inflation is hiking interest rates aggressively. While this cools the economy in the short term, it renews investor confidence in the currency and the bond market strengthening it. It cools imported inflation and helps CAD. Bond market matters a
Lot as it is much bigger and a direct indication of foreign funds confidence in the CBs ability to arrest and tackle any uncertainty. Aggressive hikes mean aggressive pain points in the short term but they also result in a shorter cooling period usually.
If done well, the recovery is very good, the deadwood is eliminated, the economy experiences a beautiful sunrise and the markets boom. If the CB instead chooses QE over aggression which ECB was doing thus far, investor confidence loss results in rise in yields,large scale outflow
And a possible Bop crisis. Hence during a recession or a slowdown, the medicine needs to be bitter. A spoonful of sugar will not help the medicine go down :D. This is done to strengthen the foundation. We saw that when ECB went for an unprecedented 75 point increase, the EU has
Responded. Today’s events are proof of that. Subsequently, we can also foresee the Fed’s actions for September rate hike. Things always get worse before they get better. While the common man feels the hit the most, CB needs to ensure confidence is not eroded which depends on
External factors mainly smart money. One can argue on its unfairness but that’s the reality of a globally interconnected market.
A special thank you to VInay @vka27 for his valuable inputs. #Inflation #BondYield #Currency #CentralBanks
@threadreaderapp unroll
• • •
Missing some Tweet in this thread? You can try to
force a refresh
