WSJ Fedwatcher Nick Timiraos is out with his last and says:
“Federal Reserve officials await another rate hike of 0.75 percentage points” and whether to signal a smaller hike in December.
He highlights a divide in the Fed where some want to slow the rate of hikes and others are worried that inflation will not fall.
“Fed policymakers face a series of decisions. First, do they raise interest rates by a smaller half-point increase in December? And if so, how do they explain to the public that they are not backing down in their fight to prevent inflation
Inflation
Inflation is defined as a quantitative measure of the rate at which the average price level of goods and services in an economy or country increases over a period of time. It is the increase in the general price level where a given currency actually buys less than it did in previous periods. When it comes to assessing the strength or currencies, and by extension foreign exchange, inflation or measures of it are extremely influential. Inflation stems from the overall creation of money. This money is measured by the level of the total money supply of a specific currency, such as the US dollar, which is constantly increasing. However, an increase in the money supply does not necessarily mean that there is inflation. What leads to inflation is a faster increase in the money supply relative to the wealth produced (as measured by GDP). As such, this generates demand pressure on a supply that is not increasing at the same rate. The consumer price index then increases, generating inflation. How does inflation affect Forex? The level of inflation has a direct impact on the exchange rate between two currencies at several levels. This includes purchasing power parity, which attempts to compare different purchasing powers for each country according to the general price level. This makes it possible to determine which country has the most expensive cost of living. Consequently, the currency with the higher inflation rate loses value and depreciates, while the currency with the lower inflation rate appreciates in the foreign exchange market. Interest rates are also affected. Inflation rates that are too high push up interest rates, which results in the currency depreciating in terms of foreign currency. Conversely, inflation that is too low (or deflation) pushes down interest rates, which has the effect of appreciating the currency in the foreign exchange market.
Inflation is defined as a quantitative measure of the rate at which the average price level of goods and services in an economy or country increases over a period of time. It is the increase in the general price level where a given currency actually buys less than it did in previous periods. When it comes to assessing the strength or currencies, and by extension foreign exchange, inflation or measures of it are extremely influential. Inflation stems from the overall creation of money. This money is measured by the level of the total money supply of a specific currency, such as the US dollar, which is constantly increasing. However, an increase in the money supply does not necessarily mean that there is inflation. What leads to inflation is a faster increase in the money supply relative to the wealth produced (as measured by GDP). As such, this generates demand pressure on a supply that is not increasing at the same rate. The consumer price index then increases, generating inflation. How does inflation affect Forex? The level of inflation has a direct impact on the exchange rate between two currencies at several levels. This includes purchasing power parity, which attempts to compare different purchasing powers for each country according to the general price level. This makes it possible to determine which country has the most expensive cost of living. Consequently, the currency with the higher inflation rate loses value and depreciates, while the currency with the lower inflation rate appreciates in the foreign exchange market. Interest rates are also affected. Inflation rates that are too high push up interest rates, which results in the currency depreciating in terms of foreign currency. Conversely, inflation that is too low (or deflation) pushes down interest rates, which has the effect of appreciating the currency in the foreign exchange market.
Read this term from getting stuck?”
The market is 93% priced for a 75 bps hike with the remainder at 100 bps. But the market is taking a dovish reading of this report as it highlights the potential for a slowdown later.
The American dollars
American dollars
The US dollar, (symbol $, code USD) is the fiat currency of the United States (USD) and the most traded currency globally. It was introduced in the United States in the late 18th century, with paper notes not being distributed until the following century. The US dollar, also informally known as the greenback, is the world’s primary reserve currency, largely due to the importance of the US economy on the world stage. Once backed by gold (in the 20th century), the USD is now a pure fiat currency, ie not backed by a physical commodity. The former gold standard pegged to the US dollar made both gold and silver legal tender in the US, with the guarantee that US$1 could be converted into one and a half grams of pure 24 karat gold. However, the gold link was eventually abolished by President Richard Nixon in 1971. Since the gold standard was cut, the US dollar has become the world’s main reserve currency. This means that foreign nations hold large amounts of their cash reserves in USD, accounting for approximately 65% of the world’s foreign exchange reserves. How to trade with US dollars? The US dollar is traded in a variety of ways, most notably in the forex (currency) market versus other currencies; sold as a pair. Each retail broker offers exposure to the USD in many currency pairs, given its popularity and liquidity. The USD is involved in the majority of the most traded currency pairs, such as EUR/USD, USD/JPY, GBP/USD and USD/CHF, known as the “four majors”, and the “commodity pairs”, i.e. AUD/USD, USD/CAD and NZD/USD.
The US dollar, (symbol $, code USD) is the fiat currency of the United States (USD) and the most traded currency globally. It was introduced in the United States in the late 18th century, with paper notes not being distributed until the following century. The US dollar, also informally known as the greenback, is the world’s primary reserve currency, largely due to the importance of the US economy on the world stage. Once backed by gold (in the 20th century), the USD is now a pure fiat currency, ie not backed by a physical commodity. The former gold standard pegged to the US dollar made both gold and silver legal tender in the US, with the guarantee that US$1 could be converted into one and a half grams of pure 24 karat gold. However, the gold link was eventually abolished by President Richard Nixon in 1971. Since the gold standard was cut, the US dollar has become the world’s main reserve currency. This means that foreign nations hold large amounts of their cash reserves in USD, which accounts for approximately 65% of the world’s foreign exchange reserves. How is the US dollar traded? The US dollar is traded in a variety of ways, most notably in the forex (currency) market versus other currencies; sold as a pair. Each retail broker offers exposure to the USD in many currency pairs, given its popularity and liquidity. The USD is involved in the majority of the most traded currency pairs, such as EUR/USD, USD/JPY, GBP/USD and USD/CHF, known as the “four majors”, and the “commodity pairs”, i.e. AUD/USD, USD/CAD and NZD/USD.
Read this semester has returned some gains and it shows:
- USD longs are a tight trade
- Timiraos has a lot of credibility with markets
That said, the article doesn’t read like any kind of signal to me. It highlights the divisions at the Fed and the information officials will need before they make a decision at the FOMC in December. The content of the article is also less clever than some of the headlines that come out of it.
Also, is it possible that the BOJ tried to stomp USD/JPY at the same time?
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