Short view By Philip Coggan - Financial Times
Short view
By Philip Coggan
Published: March 30 2006 03:00 | Last updated: March 30 2006 03:00. Copyright by The Financial Times
The Federal Reserve's statement on Tuesday convinced most economists that US interest rates will be raised at least one more time, to 5 per cent. The statement was initially seen as positive for the dollar (by bolstering the currency's yield support) but mildly negative for equities and bonds.
The 10-year Treasury bond yield briefly touched 4.8 per cent after the announcement, while the two-year yield was trading above 4.8 per cent yesterday. Since it is likely that first quarter US gross domestic product growth numbers will be very strong, it is possible that bond yields will push higher.
For the rest of the world, the key question is how higher US short rates, together with the expectation of eurozone rate rises and the removal of quantitative easing by the Bank of Japan, will affect the flow of liquidity into financial markets.
Higher short rates and higher bond yields will increase the allure of investing in developed markets and reduce the temptation to take risk in higher-yielding currencies. Both the Australian and New Zealand dollars, classic high-yield plays, accordingly fell yesterday.
The antipodean currencies may be useful weathervanes for global financial conditions. David Bowers, a Merrill Lynch strategist, says the cross-rate between the Australian dollar and Swiss franc has interesting relationships with other variables. He says that when the Australian dollar weakens against the Swiss currency, global growth expectations tend to deteriorate and emerging market equities tend to weaken.
The Australian dollar is behaving like a low-quality cyclical asset, while the Swiss franc acts like a high-quality defensive asset. So when the Australian dollar starts to deteriorate, it is time to take a more defensive stance.
Meanwhile, Graham Turner of GFC Economics has ranked global currencies in terms of their creditworthiness, using 11 factors such as the current account deficit and the ratio of exports to short-term debt.
"New Zealand is by far the highest risk," he says. "It scores badly on every one of the 11 indicators." With Iceland's economic problems already troubling investors, the next test for markets could come from the other side of the world.
By Philip Coggan
Published: March 30 2006 03:00 | Last updated: March 30 2006 03:00. Copyright by The Financial Times
The Federal Reserve's statement on Tuesday convinced most economists that US interest rates will be raised at least one more time, to 5 per cent. The statement was initially seen as positive for the dollar (by bolstering the currency's yield support) but mildly negative for equities and bonds.
The 10-year Treasury bond yield briefly touched 4.8 per cent after the announcement, while the two-year yield was trading above 4.8 per cent yesterday. Since it is likely that first quarter US gross domestic product growth numbers will be very strong, it is possible that bond yields will push higher.
For the rest of the world, the key question is how higher US short rates, together with the expectation of eurozone rate rises and the removal of quantitative easing by the Bank of Japan, will affect the flow of liquidity into financial markets.
Higher short rates and higher bond yields will increase the allure of investing in developed markets and reduce the temptation to take risk in higher-yielding currencies. Both the Australian and New Zealand dollars, classic high-yield plays, accordingly fell yesterday.
The antipodean currencies may be useful weathervanes for global financial conditions. David Bowers, a Merrill Lynch strategist, says the cross-rate between the Australian dollar and Swiss franc has interesting relationships with other variables. He says that when the Australian dollar weakens against the Swiss currency, global growth expectations tend to deteriorate and emerging market equities tend to weaken.
The Australian dollar is behaving like a low-quality cyclical asset, while the Swiss franc acts like a high-quality defensive asset. So when the Australian dollar starts to deteriorate, it is time to take a more defensive stance.
Meanwhile, Graham Turner of GFC Economics has ranked global currencies in terms of their creditworthiness, using 11 factors such as the current account deficit and the ratio of exports to short-term debt.
"New Zealand is by far the highest risk," he says. "It scores badly on every one of the 11 indicators." With Iceland's economic problems already troubling investors, the next test for markets could come from the other side of the world.
posted by Carlos T Mock at 7:31 AM
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