Volatility on the currency market has clearly subsided, but the dollar is still on the defensive. The EUR/USD pair remains near 1.2250, and the dollar index is under 90.00.
The Norwegian krone is among the strongest currencies this week, boosted by the recovery in the oil market. The barrel prices have rocketed more than 5% in London in recent days, and its rate has made up most of last week's plunge. Only the New Zealand dollar is stronger, gaining ahead of today's central bank meeting. Its stance can be qualified as one of the more hawkish ones. As in the case of Norway, the tightening has its roots in fears of an emerging real estate bubble.
Discussion on discussion
The dollar is depreciating due to over-liquidity in the global financial system, which further reduces the currency's interest rate attractiveness. An opportunity for a rebound would be provided by high readings on key indexes, led by labour market data (next Friday). They could help to remove the doubts that have been raised recently about the path of growth, and provide a stimulus to start discussions on the beginning of phasing out asset purchases and moving away from extraordinary, emergency monetary policy.
In this context, it is worth noting a recent series of statements from policymakers. Patrick Harker and Robert Kaplan, who head the Philadelphia and Dallas regional Fed, have called for such a move. However, their significance for policymaking is rather marginal, as they do not have voting power this year (the decision-making group rotates each year). Richard Clarida, Fed Vice Chairman and, next to Jerome Powell and Lael Brainard, the most influential figure in US monetary policy, has suggested that discussions on the future move are inevitable. He has suggested that talks on easing out would be possible to begin in the coming months. Mary Daly of the San Fransisco Fed, so to speak, added that what is currently being discussed is when it would be optimal to start discussing an exit strategy.
However, we believe that the trauma of 2013, which was a powerful blow to emerging markets, will not be repeated. First of all, it was a shock then and the result of miscommunication with the market. Now inflation is constantly on the agenda, and tapering has been mentioned in all cases for months. As a result, the tightening of rhetoric should only prove to be a temporary support for the dollar (and a brake on the zloty's appreciation). Only an imminent rate hike in the Fed's forecasts would be a strong stimulus. We assume that it can occur, but only next year when the question of the durability of the acceleration in inflation will be settled in writing.