Baku, Azerbaijan, June 13
By Anvar Mammadov – Trend:
Probable decision of the US Federal Reserve System (Fed) to raise the key rate won’t have a big effect on the Azerbaijani manat’s rate, John Hardy, Saxo Bank’s head of foreign exchange strategy, told Trend June 13.
The manat has been very stable over the last few rises and falls in the oil price, which is a key factor for Azerbaijan’s trade with the rest of the world, he said.
"But if the exchange rate stays stable, the government is likely to want to start cutting the policy [rate]," he noted. "After all, with the exchange rate stable, manat depositors are making strong gains in USD terms when the exchange rate is flat or lower (USD/AZN rate is lower), given the policy rate of 15 percent relative to the US rate of 1 percent."
Regarding the probability of the Fed’s raising the rates, Hardy noted that the Fed will do it, as the market strongly expects, adding that the Fed doesn’t like to surprise strong expectations.
"But what is more anticipated are the accompanying materials, like the Fed’s latest forecasts on inflation, employment and the "dot plot" forecasts of where the Fed sees policy rates from here," he said. "There the anticipation is that they may "soften" the guidance a bit relative to previous meeting – perhaps making a more conditional outlook that requires data to pick up again for the Fed to hike in either September or December."
The effect of the Fed’s decision for the USD will depend a bit on the size of Fed adjustments to its statement and outlook on the economy and policy, Hardy noted.
"A slightly dovish meeting is anticipated and will likely see the USD slightly weaker across the board, but the Fed can surprise either way," he said. "The biggest surprise would be a Fed that is determined to wait and see whether data continues to weaken before making any adjustments – which could see a sharply USD rally – but that isn’t our base case."
"A weaker USD could marginally affect commodity prices, but there hasn’t been much focus on the USD angle in key commodity markets – especially oil, so we see little impact there," he added. "A more dovish surprise, however, could generally see equity markets rallying strongly and especially emerging markets and currencies doing so, which are a bit more sensitive, traditionally, to the USD direction (and as the global currency is the USD, a dovish Fed is positive for global liquidity)."
Following the May meeting, the Fed kept the benchmark rate at 0.75-1 percent per annum.