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Do Interest Rates Even Matter Anymore?

Published 05/22/2017, 08:57 AM
Updated 01/01/2017, 02:20 AM

It’s hard keeping up with the uninterrupted series of allegations to hit the Trump administration. Every couple of days we hear of the latest revelation, which, at the back of our minds makes us wonder when The Donald will be able to focus on “making America great again.’ It doesn’t matter if you’re a republican or a democrat, the flowof crises’may be fascinating, but the endless commentary is psychologically draining and it’s starting to all seem a bit like a circus.

Hold a thought for the investment analysts who despite having a difficult enough time coming up with models on how Trump’s pro-business policies will impact asset prices and valuations, can’t even be sure that Trump will make it through to the end of his 1st term. Undoubtedly, many of them throwing their hands up in the air and crying ‘what’s the point!’ Here are couple of statistics that paint a picture of just how dire the situation is:

With all the sensationalist and heavy hitting headlines coming out, the markets in turn seem to have thrown fundamentals out the window. Forget that a renewed sense of optimism has prevailed in the US, the VIX has pretty much bottomed out and that the economy is powering ahead leading to high expectations the Fed will raise rates in June (though these odds have fallen to 60% from 80% a week ago). Despite this, demand for the greenback has plummeted and the US dollar index has fallen almost 5%.

Safe-haven currencies and precious metals are now attractive in a counter intuitive financial environment. It’s extraordinary that Japan,a country stuck in a deflationary cycle, continuously injecting stimulus into its economy and won’t be able to raise rates pretty much forever, has a currency that is still so weighty against the USD. Yes, I’m aware of the JPY’s popularity in times of uncertainty, but still.

It’s a difficult time for derivatives traders, both professional and amateur. A quick scroll through forex trading internet forums indicatefrustration and exasperation. Levels seem to have been thrown out the window, trends seem to turn on a dime and the increased volatility has made currency trading dangerous. In such an environment, the big hitters such those who run hedge funds, may have taken to the sidelines. Perhaps this is why volume may have dried up leading to large forex price swingswhile the VIX closed below 11 for a record 17 days straight last week– only shooting up when the I-word started being uttered in hushed tones.

The markets will surely move again in a direction that makes sense but while the storm doesn’t seem to be abating we don’t know the extent of its magnitude either. If you’re one of those tracking the experts by bunkering down and waiting this out, you may need stocked-up supplies,‘cos this storm may take a while to pass.

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