Brief FX & Rates: US Rates: A Bid for Real Yields and more

In this briefing:

  1. US Rates: A Bid for Real Yields
  2. The Growing Weight of Digital Currencies in Mainstream Finance

1. US Rates: A Bid for Real Yields

  • The US FOMC will announce its policy rate decision later today. The recent volatility in global crude oil prices has changed the dynamics a little. Developments in the Middle-East can have a supply side shock to inflation, which in general, could affect global demand. Weak global demand has been pushing the Federal Reserve to make insurance cuts.
  • With global central banks maintaining an accommodative policy stance while domestic economic data in the US is still robust, adding protection against inflation is prudent, in our view.
  • US interest rates have risen over the recent few trading sessions. For investors seeing this as an opportunity to long Treasuries, we see value in owning real rates relative to nominal rates. At current levels real rates are historically cheap to nominal rates.

2. The Growing Weight of Digital Currencies in Mainstream Finance

  • Digital currencies are gaining regulators’ attention. Bank of England Governor Mark Carney’s speech at the Jackson Hole Symposium is one acknowledgement of a need for a new economic order where virtual currencies could provide a solution.
  • Digital currencies help overcome the zero lower bound problem which interest rate markets face today, in our view. Though this requires the phasing out of cash, it is easier said than done. The development of the e-Krona in Sweden offers an interesting case study.
  • With the introduction of the People’s Bank of China (PBoC) digital currency, we expect the debate between privately-owned and central bank-owned digital currencies to gain steam. In our view, central banks will have to overcome the baggage of traditional finance to make a meaningful dent in the digital currency space, which is not easy; On the other hand, there is no known mechanism to control private crypto currency inflation.
  • The world is looking for a new monetary order. Virtual currencies are likely to find a way in there, we believe.

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