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Dec will be a month to remember - BBH

Discussion in 'Fundamental Analysis' started by FXStreet_Team, Nov 13, 2015.

  1. FXStreet_Team

    FXStreet_Team Well-Known Member Trader

    Oct 7, 2015
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    FXStreet (Guatemala) - Analysts at Brown Brothers Harriman suggested that December will be a month to remember.

    Key Quotes:

    "ECB President Draghi continued to fan expectations of further accommodative measures at the December 3 meeting. At the same time, the strength of last week's US employment report, reinforced by comments from the Fed's leadership, has convinced many that lift-off is likely a fortnight after the ECB meeting. Following the jobs data, a Reuters poll found 15 of 17 primary dealers expect the Fed to hike rates next month.

    Analyst and journalists have scrambled to look for the last time the Fed and European policy moved in opposite directions in the same month. What happened? The US dollar continued sell-off. Some are using this experience to push against the dollar bullish view that prevails.

    There are several problems with this logic. First, while we respect the effort to look at past divergences, there is simply too small a sample set to derive any meaningful conclusion.

    Second, academic studies have repeatedly found that forwards, which are based on interest rate differentials are poor predictors of future currency movement. In 1994, the German Bundesbank cut rates, the Federal Reserve hiked, and that dollar did not rally. This seems to simply confirm what the academic studies suggest.

    Third, foreign exchange and interest rates are two dimensions of the price of money. Of course, there is a relationship. The problem is that the relationship is not linear. Yet many observers insist on thinking linearly. Think cycles. Here is an idealized version. The US economy weakens. The dollar retreats. The Fed cuts interest rates. The dollar sells off further. US market rates may begin to rise (in relative or absolute terms) to compensate investors for the currency risk."
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