Today, in early Asian hours, the Chinese Yuan performed at its maximum value against the U.S. Dollar since June 2018. In both its mainland and offshore trading sessions, USD/CNY and USD/CNH have shown their three-year lows near 6.3920 and below 6.38, respectively. The onshore Renminbi remarkably rose through the key levels that pushed state banks of China to intervene at the beginning of the week. The latter circumstance may make any further big move of the exchange rate more laboured and risky, but not impossible. Anyway, what is happening fully characterises the prevailing mood in the foreign exchange market.
Generally, the U.S. Dollar Index futures for June 21 (DXM1) dipped to 89.51 yesterday, just touching its absolutely lowest level since the very first days of the current year. This is almost 14% lower than the 103.96 spike in the heat of the pandemic panic of March 2020. Paradoxically, a faster-than-expected recovery of the U.S. economy if compared with the European pace, and similar processes in most of the other parts of this world, makes the Greenback the least sought after currency. Its protective, or as many call it safe-haven role, becomes irrelevant when there is nothing so special to protect it.
On the other hand, as far as practical cost of the major reserve currency is concerned, the dilution of the money supply due to the endless stimulus measures for trillions of Dollars plus the monthly asset purchase program from the Federal Reserve (Fed) will continue, taking into account the recent dovish comments from the U.S. regulator's influential representative, Richard Clarida. The Fed's vice chairman, again, played down the significance of rising inflation and made some remarks on Tuesday evening when he spoke with Yahoo Finance to discuss different risks and what lies ahead for Fed's policy.
When asked if he could agree with a point of view that reporters have heard before from Philadelphia Fed President Patrick Harker in addition to Dallas Fed President Robert Kaplan that they would prefer to have discussions at least on tapering, pulling back the quantitative easing program pace, sooner rather than later, Mr Clarida answered: "I think the [Fed] minutes stated well my thinking and obviously, most of the committee. It may well be the time that... in upcoming meetings we’ll be at the point where we can begin to discuss scaling back the pace of asset purchases... Again, I think it's gonna depend on the flow of data that we get... the pandemic that shut down the economy... was really unprecedented I think in everyone's lifetime. You'd have to go back to 1918 probably, and shutting down the economy put very substantial downward pressure on prices. Reopening the economy is clearly, as we saw in the CPI report, putting some upward pressure on inflation, and so we're doing what statisticians call a signal extraction exercise in a complex period. So we need to be humble, we need to acknowledge there's a risk case on both sides, and... as the data comes in throughout the rest of the year, we will at a point, as a committee, be able to assess that and communicate what that means for meeting our substantial progress test."
He also added that Fed's underlying goals have not changed, as the U.S. regulator wants to get to the maximum level of employment consistent with price stability in the long run. But "we want inflation to average 2% over time" Mr Clarida said, which means the short-run horizon for price performance may be allowed to rise for some time. Also he mentioned that the Fed is now using some "staff index" for internal use, and Mr Clarida is personally a "big fan of it". This indicator is called "the index of common inflation expectations, and it's essentially an agnostic, statistical approach to extract the common element in more than 20 different indicators of expected inflation". Next, he concluded that this staff index is "right around 2% right now", after it drifted down "a bit" in the pandemic. He also added, he could argue that "it's very much in a range that’s consistent with well anchored inflation expectations". Then he also remarked about the necessity to wait for the signs of wage growth, not to be just satisfied with a relatively low percentage of unemployment.
So, the second person in the Fed's command prefers to deal not with the actual realised inflation but with some ephemeral inflation expectations which may be assessed in their own way, and non-transparent for the public. It is worth recalling that just about a month ago, the Fed's Chair said that it was not yet the time to even contemplate discussions around policy tapering. Jerome Powell and his team are feeling, or at least they choose to share with the market the feeling, that the current enormous inflationary outburst is just an episode. "There's always signal and noise in data and unfortunately we’re in a period where the ratio of signal to noise is probably lower than on average, which is why we're looking at a wide range of indicators", that's another and final excerpt from Richard Clarida's interview. Therefore, the general market sentiment may take into account a seemingly Fed's unwillingness to look too closely at the current reality in order to adhere to some "lockstep" principles of Fed's ultra-dovish monetary policy. This seems to be very calming and reassuring for the stock exchanges, and at the same time it supports the soft anti-dollar tendencies on the Forex market.
Against this unusual background, not only the Chinese Yuan, but almost the entire basket of major world currencies rose higher, including the Euro soaring above 1.22 today, even despite the ultra-soft policy of the European central bank too. The leading currencies of emerging economies, such as the South African rand with high yields on local bonds, also benefit, as USD/ZAR went well below 14 this week. NZD/USD also shifted another 1.1% higher today as the Reserve Bank of New Zealand hinted at a possible rate hike as early as September 2022. After the recent demarche of the Bank of Canada with its first reduction of the asset purchase program by 25%, it seems that only the European country's central banks and the U.S. Fed will remain intact keeping away from any policy changes within the next couple of years.
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