the fed has signalled that they are worried about inflation whilst the market seems to be concerned with a growth slowdown. we explore how the dollar may react to a perceived inflation threat. we argue that it may mean us
continue to rise and although this may support the dollar in the short term, once growth truly starts to slow it will become apparent that rates have risen too far
and the market will start to discount rate cuts. this point in time will herald another wave of dollar weakness.
in addition, a perceived inflation threat begs the question of whether the fed will want a stronger dollar in its quest to squeeze out any price pressures. our analysis shows the link between the dollar and the inflation process is largely immaterial. in conclusion it is the dollar that is at the mercy of inflation (or a perceived inflation threat), inflation on the other hand is relatively unaffected by fluctuations in the dollar.
the yen carry trade – a currency, not interest rate, story (pg 9)
as the end of japan’s zero rate policy drifts closer the level of market uncertainty also increases. at the very least, following the end of quantitative easing, monetary policy communication becomes more challenging. the boj’s new policy framework is an attempt to be transparent, flexible and forward looking. while we remain bullish on the yen, these uncertainties may mean that jpy struggles to rally until we see some further clarity on the policy front. at 50 pips per month, the negative carry on a short usd-jpy position is still significant. beyond questions about the timing and conduct of policy, the impending end of zirp has brought the yen carry trade to be a significant focus for central banks, international monitoring agencies and the market.