Currency Point: Is Stagflation a trap for FX?

There is so much noise out there at the moment around ‘stagflation’ and the comparison to the 1970’s supply shock.

Yes, US inflation is at a 13-year high. And yes, the main reason for this surge is supply shocks in commodities (oil etc.). But that this is not the 1970’s oil crisis nor is the world experiencing a 1970’s supply chain stagnation. The world is however experiencing solid and expanding economic activity and there is plenty of room to run as economies emerge from COVID restrictions.

This is why the stagflation 1970 comparison is overblown as we do not appear to be heading into a high inflation low growth environment – quite the opposite in fact. There are growing signs that the oil price surge is down to demand and economic activity that has caught supply off guard. This is not a stagflation environment it is a ‘heated’ environment’.

This is why in the short term we do need to acknowledge the underappreciation of inflation risk in markets. Producers have well and truly underestimated the resurgent demand; shipping port backlogs are getting worse which is leading to increases costs; and as stated already, commodities are putting additional price pressures into the market.

This is going to pressurise bond markets and interest rate dependent securities. It is also adding fuel to the fire of central bank policy settings. Just last week the Bank of England’s Chief Economist Huw Pill warned that the November meeting is now ‘live; discussion on rate rises – interestingly GBP/USD fell post this speech to $1.372.

So, is the stagflation idea a trap? It appears to have been over the past few weeks.

The AUD is the perfect example – jumping on the RBNZ bandwagon of rate hikes, the hot oil and gas price and the idea inflation in 2022 is going to run away from the RBA. This was quickly
hosed down by Philip Lowe’s address to a central bank panel as he rejected the idea of exchange rate targets but more importantly clearly stated that a ‘sustainably higher inflation rate would not occur without an accompanying increase in wages.’

AUD/USD has rallied some 4 cents on the forces described above by falling from $0.754 to $0.746 on the comments from Lowe. This is the risk – inflation is hot, this is true, but is the inflation move going to lead to actual changes in rate policies? The answer so far is no. The Fed splitting the debate between ending QE and rates. The ECB and RBA are the same.

So be wary of the stagflation trap.




Start Trading
in Minutes

bullet Access 10,000+ financial instruments
bullet Auto open & close positions
bullet News & economic calendar
bullet Technical indicators & charts
bullet Many more tools included

By supplying your email you agree to FP Markets privacy policy and receive future marketing materials from FP Markets. You can unsubscribe at any time.




Source - cache | Page ID - 21542

Get instant Updates in Telegram