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Dollar strength to constrain Fed - NAB

Discussion in 'Fundamental Analysis' started by FXStreet_Team, Nov 26, 2015.

  1. FXStreet_Team

    FXStreet_Team Well-Known Member Trader

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    FXStreet (Delhi) – Research Team at NAB, suggests that if the Fed is to deliver no more than two additional tightening in 2016, we’d struggle to believe this is going to deliver a materially higher dollar.

    Key Quotes

    “Relevant to this view is the somewhat circular argument that the strength of the dollar is in itself likely to represent a significant constraint on the extent of tightening next year. Indeed, Fed Vice Chairman Stanley Fischer made clear in his 13 November speech - on “FX transmission to output and inflation” - that the tightening in monetary conditions implied by the dollar’s rise to date was a key reason for the Fed’s inaction on rates this year.”

    “As Fed chair Yellen and others have made clear, the Fed is assuming that base effects from past dollar strength and oil price weakness will be falling out in 2016 to drive headline inflation higher. This isn’t a claim that can yet be made with a high degree of confidence, considering that the dollar has risen by over 5% in just the past month, and oil has fallen by over 15% thus far in November.”

    “Fischer also noted in his speech that negative impacts of past dollar strength on economic activity could last for a good while yet. In this respect, we’ve been noting in recent presentations to clients that compared to 2004-6 when the Fed was last tightening, the US has become a significantly more open economy and relatively smaller in global terms given the there-fold increase in the size of China’s economy.”

    “As such, the US economy is much more sensitive to the currency today than was the case just ten year ago.”
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