Insight & action

BOE's Carney to Markets: Rates Will Rise, Like It or Not

A stunning revelation overnight from Bank of England Governor Mark Carney...

Mr. Carney is effectively telling markets to wake up from the global central bank induced slumber of unlimited liquidity. His message: Rates will rise, like it or not.

RBC chief economist Tom Porcelli calls it "lift off" and this morning on Surveillance he told us it will happen in the U.S. later this year. He echoes Deutsche Bank economist Carl Riccadonna, who discussed "positive change" in the U.S. economy on Tuesday's show, as well as a recent Bloomberg Poll which indicates more than half of economists surveyed believe rates will rise faster than Eurodollar futures imply.

Mr. Carney's warning shot from across the pond takes on particular relevance when we consider the U.S. recovery is further along than Britain's. Growth and inflation in the U.S. are higher than in the U.K., unemployment is lower. So if he's telling markets to start thinking about higher rates, surely U.S. investors should do the same.

Taking Mr. Carney at face value, and acknowledging increasingly hawkish voices within the Fed, we sense an Anglo-American alliance which stands in stark contrast to the more accommodative Bank of Japan and the European Central Bank.

This is why Citigroup's head of foreign exchange, Steven Englander, told Mike McKee on Bloomberg Radio this morning "The U.S. dollar will strengthen in 12 months as it becomes very clear the Fed will have to raise rates.”

Looking at the chart of the U.S. Dollar Index (DXY), a basket of the U.S. dollar against six major global currencies, we see plenty of upside. So do the 24 currency strategists tracked by Bloomberg. They collectively forecast a year end value of 84.0, an increase of 4.4 percent from the current spot price.

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