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Normalization Ideas Weigh On Greenback

Marc Chandler profile picture
Marc Chandler


  • Markets seem to believe the major central banks will begin normalizing policy, but do not think the Fed will continue.
  • The BOJ also is an exception.
  • USD technicals appear stretched, but no divergence or sign of an imminent top.

A virus has spread across the markets as the first half drew to a close. Many investors have become giddy. The low vol environment was punctuated by ideas that the peak in monetary accommodation is past and that the gradual process of normalization is beginning. Some investors may be exaggerating how soon the Bank of England and the European Central Bank will raise interest rates, but there seems to be little doubt about the direction of policy going forward.

It is not just the ECB and BOE. The Bank of Canada meets on July 12, and the market is pricing in around a 75% chance of a hike. The Reserve Bank of Australia and Sweden's Riksbank meet in the week ahead, and they too will likely embrace the prospects of normalization. Ironically, it is only the US, which has seen core CPI and core PCE move lower for four consecutive months, that the market doubts. Using either the fed funds futures or the OIS market, it appears that less than a 50% chance of hike before the end of the year is discounted.

The BOJ is the other exception. It has refrained from discussing an exit strategy. Its core inflation rose 0.4% in May. The target is 2%. The core rate includes energy. If energy is excluded as well, prices in Japan are flat year over year, while overall household spending contracted for 15 months year over year through May. With the collective wisdom of the markets judging that the Fed and BOJ will lag behind other central banks in the period ahead, the dollar and yen were the poorest performing major currencies last week and for the month of June.

The Dollar Index slumped 1.6% in the last week of June. This offsets the minor gains it had recorded

This article was written by

Marc Chandler profile picture
Marc Chandler has been covering the global capital markets in one fashion or another for 25 years, working at economic consulting firms and global investment banks. A prolific writer and speaker he appears regularly on CNBC and has spoken for the Foreign Policy Association. In addition to being quoted in the financial press daily, Chandler has been published in the Financial Times, Foreign Affairs, and the Washington Post. In 2009 Chandler was named a Business Visionary by Forbes. Marc's commentary can be found at his blog (www.marctomarket.com) and twitter www.twitter.com/marcmakingsense

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Comments (7)

Marc Chandler profile picture
Johnny , there is no GDP target. Unemployment rate is lower than typically associated with full employment (goal) and core PCE (its targeted inflation measure) has eased for the past four months through May. The third objective is financial stability, which as I noted, Fed leaderships has begun playing such considerations up in commentary.
johnnygbx profile picture
Oops I meant inflation target...the holiday weekend bit me...

Thanks again Mr. Chandler for your articles and participation in the comments section.
johnnygbx profile picture
Is the Fed anticipating that US banks are now preparing to lend at rates below IOER? That might help to explain why the Fed has been talking about normalizing recently.

If a bank's choice is to not lend and see increasing sovereign debt and deflation with no end in sight, or lend and see the potential for increasing gDp and stimulating inflation, then I can see that bank find value in lending...especially if the US banking establishment as a whole is in agreement.

Seems it's either sit on IOER and watch foreign capital scoop up American businesses and resources or get in the game before there's no other game left for US banks to play...
johnnygbx profile picture
Just read this, which I understand implies that rising IOER will motivate banks to avoid deploying their reserves into the economy after all:
Marc Chandler profile picture
Just for record, IOER is a misnomer. The Fed pays interest on all reserves not just excess.
johnnygbx profile picture
Thank you sir for the clarification.
It's been interesting to see the continuing efforts by the Fed to keep the US financial system strong while gDp struggled to reach their target.
$ closing in on H2 seasonal weakness. gold will do well next week
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