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Forex: The new reality of higher rates

There is reason to take some comfort from yesterday’s price action. After the re-pricing of interest rate expectations (higher) in the wake of Yellen’s clumsy verbal acrobatics, equity markets managed to stage a respectable recovery on the back of better economic data, which offers some comfort that the prospect of higher rates (the implication from better data) is not going to lead to a drastic re-pricing of equities. We saw a similar tone during Asia trade, with Chinese equities staging a decent bounce back of nearly 3% on the Shanghai composite.

But it is always going to be a difficult balance preparing markets for the inevitability of higher rates at some point in the future, so that the inevitable move higher in market interest rates does not become messy. We are not at that stage yet, but it is something to watch out for and a strong reason to suspect that the next quarter could be one of broader dollar strength. For today, the data is second tier, just Canada holding the attention with retail sales and CPI data. The Canadian dollar has retained the weaker stance gained earlier in the year, with USDCAD making a new high for the year at 1.1279 yesterday.

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