Can An Interest Rate Hike Ever Cause a Currency to Depreciate?
Economic wisdom suggests no - that higher interest rates lead to a reduction in expected inflation and, ceteris paribus, an appreciation of the currency. Nick Rowe has a rather bizarre thought experiment that gives a scenario where an interest rate hike could cause a depreciation. I do not think I buy Rowe's argument, but I really need to think about it more. I would love to hear your insights.
As an aside, Rowe adds:
But were those words unexpected enough to cause the Loonie to drop by 2% Tuesday morning against the US dollar and the Euro? Then recover it all before dropping back again? Dunno. Like Stephen, I can't make sense of the forex market sometimes. The intraday oil price blip doesn't seem big enough to explain it.
The MERT relationship suggests that a $1 rise in oil should coincide with a 0.62 cents rise in the Canadian dollar. On Wednesday the Canadian dollar rose 0.43 cents (from 95.17 to 95.60), but WTI cushing rose $1.95 - suggesting the Canadian dollar should have rose by 1.21 cents. On Tuesday the Canadian dollar dropped about 2 cents, but oil prices dropped only 60 cents (from $79.47 to $78.87). On both days the dollar 'went down' relative to where it should have gone given oil prices.
Comments
Are oil prices in dollars or logged values in the MERT?
For anyone who doesn’t know, the Canadian dollar has been on a tear for the past few months. It has several reasons for it’s recent drop. The first reason being that there is rhetoric coming from the Bank of Canada about it’s rise being too fast. The second reason being that forex is very much driven by future expectations. The BOC hinted that rates are not going up any time soon. This causes the investors that were expecting a raise in rates to be sooner to bail out of the Canadian dollar.
I have seen situations where there is a rate hike, but investors do bail out of a currency. If a currency is high yielding due to interest rate and the central bank hikes, but issues a statement saying they are done hiking, you will see a stampede of investors hit the doors, because the future of that yield becomes uncertain. It’s typical of currency investors to chase yield, but if anything even hints off that the future of that yield is in jeopardy, they usually head for the door. Thus, it’s possible to see investors fleeing a currency after a hike in rates.
U.S. capital markets will test theirback up systems on Saturday. It is an industry exercise designed to simulate an interruption of regular trading activity:
David Mouriel
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What is the Business Cycle?
By Mike Moffatt, About.com
See More About:business cycleexpansioncontractionpeaktroughQuestion: What is the Business Cycle?
Answer: Parkin and Bade’s text “Economics” gives the following definition of the business cycle:
The business cycle is the periodic but irregular up-and-down movements in economic activity, measured by fluctuations in real GDP and other macroeconomic variables.
If you’re looking for information on how various economic indicators and their relationship to the business cycle, please see A Beginner’s Guide to Economic Indicators. Parkin and Bade go on to explain:
A business cycle is not a regular, predictable, or repeating phenomenon like the swing of the pendulum of a clock. Its timing is random and, to a large degress, unpredictable. A business cycle is identified as a sequence of four phases:
Contraction (A slowdown in the pace of economic activity)
Trough (The lower turning point of a business cycle, where a contraction turns into an expansion)
Expansion (A speedup in the pace of economic activity)
Peak (The upper turning of a business cycle)
A recession occurs if a contraction is severe enough… A deep trough is called a slump or a depression.
The difference between a recession and