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Off the Charts

07 Sep 2023

A yen for change

Sometime in the mid-seventies, the Nobel prize-winning economist Simon Kuznets is believed* to have said that there were “four types of countries in the world: developed, underdeveloped, Argentina, and Japan”. Surprisingly, not much has changed in the intervening years – both economies remain truly exceptional along a number of dimensions, with the results playing out in the foreign exchange markets. The Argentinian peso has fallen so low that politicians are – again – campaigning on (probably misguided) pledges to peg the currency to the dollar. And the Japanese yen has led the developed world in relative weakness since the pandemic....

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06 Sep 2023

Higher for longer?

In the consensus view, the Bank of Canada is done hiking and will begin cutting rates by mid-2024 – and if you looked at the loonie’s reaction around 10:00 am this morning, it would seem that the central bank’s announcement was in line with that view. But with US Institute for Supply Management numbers landing at the same time and pushing the dollar higher against most of its major counterparts, overnight index swap rates – which Bloomberg uses to guide its famous/infamous WIRP function – might offer a cleaner read.  To us, it looks as if markets have simply pushed...

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05 Sep 2023

Lowered expectations

As a long-ago MadTV skit illustrated, lowered expectations can be the key to happiness – in dating, and in life. Something similar applies in the currency markets, where – to paraphrase the behavioural investing expert Michael Mauboussin – traders need to assess the level of expected performance embedded in exchange rates and then assess the likelihood of a revision in expectations. If expectations seem poorly aligned with future results, volatility is likely ahead. Our turnover-weighted measure of economic surprise indices, which represents the gap between consensus forecasts and official data across the major currencies relative to the United States, suggests...

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26 Jun 2023

Weekly Update

The direction and magnitude of changes in euro area core producer price indices have tended to lead the core consumer price index by 6 to 9 months. A sharp easing in price pressures looks likely in coming months. Euro area inflation is (probably) headed down. Price indices, % annual change Inflation pressures – as measured using the New York Fed’s “Underlying Inflation Gauge” are trending solidly downward, suggesting that relief could come in the next few months, even if May’s data remains elevated. US inflation could come down even faster. Personal Consumption Expenditures indices and Underlying Inflation Gauges, % annual...

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23 Jun 2023

Mexican Peso Snapshot

Although core inflation remains stubbornly elevated in both the US and Mexico, the signs of an eventual decline are clearly evident. Inflation is rolling over. Core Consumer Price, % Annual Change The Federal Reserve is on the verge of pausing – and ending – its rate hikes. This is impacting expectations for the Banco de Mexico. Monetary tightening cycles are ending. Cumulative change in Federal Funds Rate since initial increase, % Central bankers in both countries are closely aligned on the need for a “higher for longer” policy stance – and although markets are pricing in modest cuts in the...

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