Central Banks, Rising Rates, and Inflation Surprises

by: , Portfolio Strategist, New York Life Investment Management
  • Currency-sensitive investors grappled with an onslaught of political events, central bank meetings, and the release of various economic data points.
  • The U.S. Federal Reserve raised the Federal Fund’s Rate for the third time in six months on Wednesday, despite some concerns that the economy is faltering.
  • The U.S. dollar ended only slightly higher against a basket of currencies.

On June 8, the European Central Bank (ECB) left rates unchanged for the region. Mario Draghi, ECB President, said a substantial degree of monetary accommodation was necessary for the Eurozone. He also reaffirmed the ECB’s preparedness to increase its asset-purchasing program, despite the recent pickup in growth. The U.S. dollar gained ground against the euro but faced pressure later that day when James Comey, former director of the Federal Bureau of Investigation (FBI), gave testimony on his interactions with President Trump and the ongoing investigation into the Russian probe. These concerns pose just another potential hurdle for President Trump’s pro-growth agenda and the reflation trade.

The U.S. Federal Reserve (Fed), on the other hand, decided to increase interest rates – as was widely expected. The morning of the Fed’s announcement, Consumer Price Inflation and retail data came in slightly lower than expected, causing the dollar and Treasury yields to nose dive. However, the Fed gave no signals that these signs of economic weakness would delay its tightening plans. In addition, the Fed signaled that it would also take steps to begin reducing its balance sheet this year. The dollar recovered and ended slightly higher against a basket of currencies.

Currency Movements Are Hard to Predict

6|14 -0.35% 0.23% 0.20%
6|7 0.12% 0.85% -0.18%
5|30 0.03% 0.85% -0.07%
5|23 0.90% 1.20% -0.77%
5|16 1.92% 0.76% -1.56%
5|9 -0.51% -1.75% 0.69%
5|2 0.04% -0.81% 0.19%
4|25 1.83% -2.40% -0.72%

Source: Bloomberg, 4/25/17–6/14/17. EUR/USD Spot Exchange Rate where the price of 1 euro is in U.S. dollars. The calculation is the one week percentage change in spot exchange rate where a negative value is the depreciation of the euro. JPY/USD Spot Exchange Rate–price of 1 Japanese yen in U.S. dollars. The calculation is the one week percentage change in spot exchange rate where a negative value is the depreciation of the JPY. The U.S. Dollar Index (USDX) indicates the general international value of the USD. The USDX does this by averaging the exchange rates between the USD and major world currencies. A negative value indicates a general depreciation of the dollar.

The information and opinions contained herein are for general information use only. MainStay Investments does not guarantee their accuracy or completeness, nor does MainStay Investments assume any liability for any loss that may result from the reliance by any person upon any such information or opinions. Such information and opinions are subject to change without notice, and are not intended as an offer or solicitation with respect to the purchase or sales of any security or as personalized investment advice. There can be no guarantee that any projection, forecast, or opinion in these materials will be realized. Past performance is no guarantee of future results.

All investments are subject to market risk, including possible loss of principal. Diversification cannot assure a profit or protect against loss in a declining market.

Securities distributed by NYLIFE Distributors LLC, 30 Hudson Street, Jersey City, NJ 07302, a wholly owned subsidiary of New York Life Insurance Company. NYLIFE Distributors LLC is a Member FINRA/SIPC.


Robert Serenbetz

Portfolio Strategist, New York Life Investment Management

Robert Serenbetz is the Portfolio Strategist with New York Life Investment Management’s Strategic Asset Allocation & Solutions (SAS) Group. He contributes to investment thought leadership and communication efforts across New York Life Investment Management

Full Bio

Leave a Reply

Your e-mail address will not be published.