Yellen gives positive outlook on the US economy
Yesterday, Janet Yellen spoke in front of Congressional leaders amid the release of the US GDP data, which as expected, climbed to 3-year high. The end of Yellen’s mandate is near as the current Fed Chair is going to be replaced next year by Jerome Powell.
Janet Yellen said in her speech that the central bank does not want to “let growth get out of hands”. The Fed certainly prefers the debt to get out of hands. That was a very ironic statement from the US private bank’s chair. Yellen also mentioned that while she did not want to promise a rate hike in December, she will continue to act towards a normalization of the monetary policy. Markets are pricing in a rate hike for December.
So Yellen, as usual, keeps on being cautious regarding the rate path. It has been years that Fed officials are either “patient” or in “wait-and-see mode”. Central bankers declare that raising rates too soon could push the economy into recession. We rather believe that the Fed is unable to raise rates above a certain level or the bond bubble will likely burst. This is why we should see the Eurodollar climbing higher. In addition the short-term decline in gold is likely temporary as we believe that the Fed will have a hard time to deliver in 2018 and beyond.
Optimistic on Select EM Currencies
While the market focus is clearly on Crypto currencies conditions are steady improving for EM FX. Constructive global backdrop including improved risk appetite and strong growth will send investors deeper into select EM currencies. Current EM weakness trigger by sudden steepening in US yield curve will provide investors with attractive valuation heading into 2018. Weak US data and dovish comments indicate that the Fed is not positioning for aggressive tightening. India remains a bright spot for EM investors, as 3Q growth should recover and likely surprise to the upside. Domestic conditions including consumer spending and narrowing trade deficit will support acceleration in growth.
The RBI will likely stay on hold as inflation head marginally higher yet tighter monetary policy is a low probability until late 2018 (markets are pricing in a single 25bp hike in 2018). Positive news around the UK /EU negotiations, which indicated that an agreement on exit settlement would be widely positive for CEE. UK is the second higher net contributor to the EU budget therefore a bigger exit bill will likely soften the impact the on EU budget near-term. Further positive news will be bullish for the PLN considering the currencies historical high sensitivity to Brexit related risks.
