U.S. Dollar: Loud and Clear

U.S. Dollar: Loud and Clear

Signals came from both Jackson Hole and Beijing that the greenback might have risen enough, at least for now; Mexico and the U.S. haven’t yet come to an agreement on the level of non-U.S. investment in Mexico’s oil patch.

“There is good reason to expect that this strong [economic] performance will continue”
Federal Reserve Chair Jerome H. Powell

U.S. Dollar: Loud and Clear Markets were primed at the end of the week to read and react to yet more clarification of the Fed’s approach to hiking rates at the annual Jackson Hole central bank conference. Chairman Powell did not disappoint, making a clear case for slow, steady rate hikes in an environment where the key big-picture economic data on growth and the true neutral interest rate are both ambiguous and changing rapidly.

Powell’s remarks were widely interpreted as “dovish”, signaling that the FOMC is inclined to keep its current plan in place, rather than start to step up the pace of its rate hike schedule. Not surprisingly, financial markets reacted positively, with U.S. equity indexes rising between 0.5% and 0.8% as of mid-afternoon Friday; U.S. 10-year Treasury yields remained at about 2.826%, the 2-year yield rose some 2 basis points (bps) to 2.625%, and the 30-year stayed roughly even at 2.976%.

But the signal that may have spoken loudest came from China’s central bank, which was widely understood to have allowed Chinese banks involved in setting the daily official exchange rate to apply “counter-cyclical factors” into their rate-setting. In practice, that moved the Chinese yuan upward and away from the lower end of the official range of its basket of other currencies.

The resumption of counter-cyclical guidance was read by market participants outside of China as positive for the yuan; in reaction to this perception, the U.S. dollar index moved downward by as much as (0.75%), which is considered to be a significant change.

U.S. market observers read the change as conciliatory with respect to the continuing trade negotiations between the U.S., and China. Whether the atmosphere of the escalating tariff conflict will change remains to be seen.

Perhaps due to the generally positive news from the U.S. and China, Emerging Market currencies moved up; of 24 commonly-followed EM currencies, only the Argentine Peso fell on the news; the best-performing for the day was the Turkish lira, up 1.75% to 6.0175 per U.S. dollar.

Mexico and NAFTA: Speed bump Economic relations between the U.S. and Mexico have been surprisingly smooth since the election of Andrés Manuel López Obrador (“AMLO”), who has surprised many with his generally non-combative policy stance.

But it appears that differences between the U.S. and Mexico have emerged when it comes to opening Mexico’s strategically important petroleum sector to investors outside of the NAFTA framework.  Since NAFTA negotiations involve both current President Enrique Peña Nieto and AMLO, agreement may be difficult to achieve. And that’s before Canada’s participation in the three-country agreement.


All market-related data Source: Bloomberg, August 24, 2018 unless otherwise stated


Emerging markets (EM) are nations with social or business activity in the process of rapid growth and industrialization. These nations are sometimes also referred to as developing or less developed countries.

The Federal Open Market Committee (FOMC) is a policy-making body of the Federal Reserve System responsible for the formulation of a policy designed to promote economic growth, full employment, stable prices, and a sustainable pattern of international trade and payments.

The North American Free Trade Agreement (NAFTA) – Spanish: Tratado de Libre Comercio de América del Norte, TLCAN; French: Accord de libre-échange nord-américain, ALÉNA – is an agreement signed by Canada, Mexico, and the United States, creating a trilateral trade bloc in North America. The agreement came into force on January 1, 1994.



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