Jane Foley, Senior FX Strategist at Rabobank, point out that yesterday US President Trump stated that he was “not thrilled” with Fed Chair Powell for raising rates and also complained that during this period he “should be given some help by the Fed”.
Key Quotes
“Lower US rates would be more conducive to a softer currency, which in theory would support Trump’s aims of reducing the US’s trade deficit over the short-term. However, bearing in mind the strength of US growth currently and the loosening of fiscal policy by the Trump administration, the Fed’s current programme of gradual monetary policy tightening has been the only path open to a credible central bank.”
“The widening of interest rate differentials in favour of the USD has been an inevitable consequence. In view of our faith in the independence of the Federal Reserve we continue to expect further broad-based USD gains in the coming months.”
“The sell-off in the USD in reaction to Trump’s comments yesterday is evidence of the power of the President’s words. Equally the sell-off could be taken as a measurement of a drop in the Fed’s credibility.”
“Fed Chair Powell may find himself in an awkward situation given that he was appointed by Trump and it will be interesting if he addresses the topic of central bank independence during his speech in Jackson Hole on Friday. That said, almost all Fed watchers would agree that the FOMC would not be doing its job properly if it did not hike rates further this year.”
“If the President were to attempt to increase his influence on Fed policy, the USD would certainly fall as investors’ feet turned cold.”
“Trump extended his criticism yesterday to the FX market, stating that “I think that China’s manipulating their currency, absolutely. And I think the euro is being manipulated also”. If China were to allow its currency to float freely, it would likely fall sharply vs. the USD.”
“The EUR is a free-floating currency, although we would argue that it is weaker than a deutschmark would be if it were still in existence. As a consequence German exporters have benefitted from EMU and Germany’s trade surplus has found plenty of support from the EUR.”
“Although there is no history of intervention in the EUR, the President’s words can be construed as another warning to Germany about the size of its trade surplus with the US.”
“We anticipate that the FOMC to shake off any real concerns about its credibility. We continue to expect the USD to benefit from rising short-term interest rate differentials and outflows from emerging markets. Our 12 month EUR/USD forecast stands at 1.12.”
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