Anticipated rate cuts by the Federal Reserve are fueling investor enthusiasm and boosting the Russian ruble
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In a plot twist to the year-end financial narrative, Federal Reserve Chairman Jay Powell has delivered an unexpected Christmas surprise, setting off a positive chain reaction that reverberated not only in Moscow but across global markets.
Powell’s statement hinting at a potential peak in interest rates injected a fresh wave of optimism into the financial landscape. The S&P 500 hit its highest level in almost two years, and the Dow Jones Industrial Average achieved a historic milestone, surpassing 37,600 this week, before Wednesday’s technical correction. Wall Street celebrated the newfound certainty emanating from the central bank’s announcement.
The pivotal moment unfolded during Powell’s post-decision remarks when he signaled that the benchmark rate is nearing its zenith for the current tightening cycle. The Fed’s dot plot projections supported this shift, presenting a more dovish outlook with a projected 75 basis points reduction in rates next year and a steeper decline in 2025.
⚠️BREAKING:*FED'S POWELL: IT IS NOT LIKELY WE WILL HIKE FURTHER*POWELL: POLICYMAKERS ARE THINKING AND TALKING ABOUT WHEN IT WILL BE APPROPRIATE TO CUT RATES pic.twitter.com/Xd8NnogTLP
— Investing.com (@Investingcom) December 13, 2023
The Powell pivot is unmistakably underway, marking a notable transformation in the Federal Reserve’s stance. On December 1, Powell cautioned against premature speculation on policy easing, signaling a cautious approach. However, in a swift shift by December 13, Powell acknowledged that rate cuts are now within the realm of consideration, describing it as a topic that is actively being discussed. The swift change in tone over two weeks highlights the dynamic nature of economic considerations and the need for adaptability in financial policy navigation.
An immediate market response was palpable, with US stocks surging and Treasury yields witnessing a significant drop, particularly the two-year Treasury yield. This mirrored the evolving expectations around interest rates. Powell’s emphasis on proceeding cautiously in future rate decisions, considering economic cooling and progress in curbing inflation, underscores the Federal Reserve’s intricate task of navigating policy amid dynamic economic conditions.
In Sept, 5 Fed members expected three cuts or moreIn Dec, 11 Fed members expect three cuts or more.
— zerohedge (@zerohedge) December 13, 2023
The recent shift in the Federal Reserve’s stance, driven by the Federal Open Market Committee’s decision to maintain current rates and outline plans for at least three rate cuts in the coming year, has distinctively impacted global optimism. This is particularly evident in positive responses from European and Asian markets, notably influencing emerging markets and commodity currencies like the ruble. The move signifies a new cycle in monetary policy, striking a delicate balance between fostering economic expansion and containing inflation. Powell’s candid acknowledgment of the challenges in addressing inflation underscores the Fed’s commitment to a nuanced strategy, departing from previous discussions of rate hikes to a more open conversation about impending cuts. This reflects the Fed’s careful effort to maintain equilibrium between promoting economic growth and ensuring price stability.
In the aftermath of the Federal Reserve’s meeting last week, there was an almost 2% rise in all three major US indices. This positive momentum persisted, with US stock futures staying optimistic, indicating an acceleration of the Christmas rally.
In the wake of the Fed’s decision, Hong Kong stocks led an Asia-Pacific equity market rally, with investors endorsing the central bank’s move to conclude its interest-rate-hiking cycle. The DAX index, representing Germany’s leading 40 companies by market capitalization, has reached historic levels, marking a new record high for Germany’s stock market.
As anticipated, the European Central Bank (ECB) mirrored the Federal Reserve’s actions by opting to keep rates unchanged for a second consecutive meeting, a decision made subsequent to the cessation of its hiking initiative in October. The ECB issued a warning, acknowledging a recent decline in inflation but cautioning that a temporary uptick is likely in the near future. Concurrently, the ECB accelerated its reduction of the balance sheet.
#ECB's Lagarde: Between hike and cut there is a whole plateau of hold. pic.twitter.com/fG14X8h5Ue
— Holger Zschaepitz (@Schuldensuehner) December 14, 2023
Meanwhile, back in Moscow, the Russian market enthusiastically embraced the results of the Fed meeting and Powell’s statement. Previous expectations of the Fed’s first rate cut in May have shifted, with a 70.5% likelihood now pointing to March.
In the lead-up to the resolution of the year-end’s main intrigue, Powell provided a Christmas surprise to Russia.
The Central Bank of Russia (CBR) responded on Friday with a formal announcement on the interest rate, opting for a strategic increase from 15.00% to 16.00%, a move in harmony with prevailing market expectations. This decision reflects a bold approach to hiking rates, strategically juxtaposed against Powell’s recent dovish stance — a move that resonates positively in commodity markets, particularly within the oil sector.
As the curtain rose on this financial drama, the Russian currency embarked on an upward trajectory, with the USD/RUB pair breaking through the crucial support level of 90 rubles. This upward trend draws strength from the global depreciation of the US dollar, an upcoming tax season expected to attract foreign currency, and the resurgence of crude oil, which experienced a remarkable uptick of over 5% in recent trading sessions.
Adding to the narrative, Russia’s monetary policy has emerged as a stabilizing force, with projections of further tightening measures contributing to the ruble’s robust performance. Complementing these positive economic indicators, Russia’s gold reserves surpassed the $150 billion milestone in November, registering at $151.9 billion — a 2.2% increase from October, as reported by regulatory data.
In essence, Powell’s unexpected Christmas gift has set in motion a sequence of events with far-reaching consequences, and my personal forecast for the ruble is one of optimism. Fueled by a confluence of factors — Powell’s dovish turn, a weakening US dollar, a buoyant oil market, and Russia’s robust economic indicators — I anticipate the ruble to strengthen further. My forecast places the USD/RUB pair at 83-84 in the near term, underscoring the ruble’s resilience as a commodity currency poised for growth.
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