Higher in­ter­est rate is pro­pel­ling the dol­lar

The Star (Kenya) - - News Business - ALY KHAN SATCHU Aly-Khan is a fi­nan­cial an­a­lyst

O n Septem­ber 12, I wrote: “There­fore, my sec­ond trade of the year [And by the way, I is­sued my third trade of the year the day af­ter Don­ald Trump won the US pres­i­den­tial elec­tion – which is to buy the dol­lar] is to ‘buy put op­tions on 10-year bonds be­cause this is go­ing to pop. When it pops, the wiz­ardry won’t work any­more, and at that mo­ment there is go­ing to be one heck of a move’”.

Since Trump won, we have wit­nessed some se­ri­ously vi­o­lent moves in the bond markets. The US 10-year bond has surged 55 ba­sis points higher in two weeks, which is the biggest fort­nightly rise in 15 years, and sec­ond biggest in al­most 30 years. Of course, the US re­mains the base­line, and this has cre­ated a shock­wave across global bond markets. Higher US in­ter­est rates have pro­pelled the dol­lar higher and ver­sus the Yen, the dol­lar is +7.5 per cent over the last two weeks – its best fort­nightly per­for­mance since 1988, sec­ond best since end of Bret­ton Woods. This is big.

What we are watch­ing is the cra­ter­ing of the quan­ti­ta­tive eas­ing con­sen­sus.

Prime Min­is­ter Theresa May said this at the Conservative Party’s an­nual con­fer­ence in Oc­to­ber: “While mone­tary pol­icy – with su­per-low in­ter­est rates and quan­ti­ta­tive eas­ing – pro­vided the nec­es­sary emer­gency medicine af­ter the fi­nan­cial crash, we have to ac­knowl­edge there have been some bad side ef­fects.

“Peo­ple with as­sets have got richer. Peo­ple with­out them have suf­fered. Peo­ple with mort­gages have found their debts cheaper. Peo­ple with sav­ings have found them­selves poorer.

A change has got to come. And we are go­ing to de­liver it. Be­cause that’s what a conservative gov­ern­ment can do.”

Bri­tish Prime Min­is­ter May and Pres­i­dent-elect Trump have been pro­pelled to power on the back of older (mostly white) folks, many of whom have seen their hard-earned sav­ings over a life­time, now earn them a pal­try re­turn and a neg­a­tive one in many cases. When all the now dumb­founded poll­sters reach their ‘’mea culpa’’ mo­ment, they will all realise that they un­der­es­ti­mated the frus­tra­tion and anger of this con­stituency.

This is im­por­tant, and this is what the bond mar­ket has seen very clearly. The QE con­sen­sus is dead in the wa­ter. Stonecold dead. It is this re­al­i­sa­tion that is now cre­at­ing a neg­a­tive feed­back loop across emerg­ing mar­ket as­sets and bond prices. Trumpo­nomics is go­ing to ac­cel­er­ate this trend. Trump is propos­ing to cut taxes and in­crease spend­ing. The dol­lar is at a 13-year high, Asian cur­ren­cies are at multi-year lows and bond yields have soared. For those who have watched the flight to qual­ity un­fold here at home, this is no dif­fer­ent. Trump is ac­cel­er­at­ing a global flight to qual­ity and a stam­pede back into US as­sets.

Here in Africa, Egypt has ca­pit­u­lated. They have taken $12.5 bil­lion from Madam La­garde and freed the cur­rency. The USD/ EGP, which had been pegged at 8.88, climbed as high as 18.00 be­fore set­tling down to 16.2495 last. Nige­ria, which is in the ex­act same boat as Egypt has cho­sen a dif­fer­ent path.

Au­thor­i­ties should be able to jail for as long as two years any­body hold­ing dol­lars in cash for more than 30 days, or fine them 20 per cent of the amount, ac­cord­ing to a draft amend­ment to Nige­ria’s for­eign ex­change Act. Last week, se­cu­rity agents threat­ened to ar­rest black mar­ket money traders if they ex­changed the naira at a rate weaker than 400 per dol­lar, com­pared with the ex­ist­ing street-rate of around 460. The cur­rency’s of­fi­cial ex­change rate, which an­a­lysts say the Cen­tral Bank is still ma­nip­u­lat­ing, is 315 against the green­back. (Bloomberg).

“The CBN wants to take its reg­u­la­tory onus to fright­en­ing pro­por­tions,” an­a­lysts at SBM said in an e-mailed note on Fri­day in re­sponse to the new draft law. This is tak­ing pol­i­cy­mak­ing in­san­ity to a whole new level.

What is un­fold­ing in Nige­ria is a de­ba­cle of spec­tac­u­lar and mon­strous pro­por­tions wor­thy of a Nol­ly­wood movie all of its own.

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