A very interesting article from the IMF questions the often mooted benefits of lower oil prices on the global economy in the current environment (IMF article). It’s worth a read and they may well have a good point, which is that the disinflationary impact of lower oil prices normally gives scope for interest rate cuts, but that’s not the case in a zero interest rate world.
I heard a disturbing story over the weekend which illustrates one of the less talked about human consequences of negative interest rates. Apparently pensioners in Japan are increasingly taking to a life of crime as living on the income of fixed interest products is not so easy in a negative interest rate world. Someone has figured out that it makes more sense for these pensioners to commit crimes and then be incarcerated as they’ll be looked after by the state once they’re in prison. What a terrible terrible choice!
Let’s get back to currencies though. In the UK we’ve just had the Easter break so Monday was a public holiday. This didn’t stop sterling from moving significantly yesterday as weaker than expected inflation numbers in the United States left traders selling the greenback. GBP/USD jumped about 100pips yesterday but already today we are seeing the dollar claw back some of its losses. It’s worth noting that sterling wasn’t alone, as EUR/USD also bounced, but the extent of the GBP/USD bounce was much greater and might provide some insight into positioning in sterling at the currently. The market might be quite short of it at the moment.
This Friday, being the first of the month, is non-farm payrolls day in the United States. The labour market report remains the single most important data point every month, barring interest rate decisions from major central banks. Economists are forecasting a fairly healthy 205,000 new jobs were added in March. As usual this data will be monitored closely by investors and central banks alike to determine the likely impact on interest rates. Perhaps we should start paying closer attention to all the inflation data we are getting which is looking decidedly mixed at the moment. Even in the event that we would still be talking about a less aggressive rate hiking environment in the United States versus almost every other major economy where rate cuts are more likely to be on the agenda. The case for a stronger dollar remains…
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