Who leads whom in the interest rate market?
Or as Eugene Fama asked it in a paper in 2013, does the Fed really control interest rates?
The University of Chicago economist’s work concluded that there are a lot of forces affecting rates, where the Fed is only one small part. In fact — as this Chicago Booth comic illustration of the entire debate neatly summarises – his research concluded that up to 83 per cent of the Fed’s target rate is influenced by other short-term rates in the market. Read more
The big story on Monday is the warning from the BIS that a resurgent dollar could disrupt EM markets due to the fact that collectively the region has three quarters of its $2.6tn debt denominated in the US currency.
Meanwhile, international banks’ cross-border loans to emerging market economies amounted to $3.1tn in mid-2014, mainly in US dollars, the BIS added.
And herein lies the key problem associated with the hypothetical eventuality of no more petrodollars. A major dollar squeeze in foreign eurodollar markets.
Not that the petrodollar is near its death just yet — the US after all is nowhere near energy independent. Read more
George Saravelos at Deutsche Bank has looked at Eurozone inflation break-even rates and worries that the ECB may be losing control:
The influence of the ‘China factor’ on currency markets is waning.
That at least is the view of HSBC’s FX strategy team, headed by David Bloom. Read more
Something’s afoot in the world of RMB.
The renminbi fell on Tuesday by the most in a single day since 2012, dropping 0.35 per cent against the dollar in the onshore market by midday in Shanghai, and 0.7 per cent since Wednesday, as the FT reported.
The market has put this down to an imminent change in China’s foreign exchange regime. The narrative is that the PBOC is preparing to widen the trading band ahead of flotation and is spooking the market intentionally, so that it realises that the RMB goes down as well as up, and that carry-trades are no free lunch.
Not everyone is as convinced. Read more
Here’s a chart that caught our eye on Wednesday morning (click to enlarge):
It comes via George Saravelos at Deutsche Bank and shows the surge in short-term flows. Read more
The popular explanation for the rise in Chinese repo rates is being linked to the government’s desire to rein in the shadow banking sector. That is to say the tightness is intentional.
But what if it isn’t. What if it has more to do with the unwind of yet another carry trade? Read more