Last month, the Bank of Jamaica (BOJ) adjusted its monetary policy to combat inflation, which had breached the target.
As at January 2022 inflation rate of 9.7 per cent remained above the upper limit of the central bank’s target range. And this is projected to continue over the next 10 to 12 months.
So how will that affect long-term investments for those trading in the US market?
Eugene Stanley, VP of Fixed Income & Foreign Exchange at Sterling Asset Management, discusses his insights on the rise of foreign exchange rates and BOJ’s monetary policy.
“As to how that will affect an investor in the US, I am not particularly convinced that will make much of a difference. The truth is the US, like many other global countries and markets, are also dealing with the rise in inflation. Other central banks are also taking steps to increase their rates to try and curb inflation,” he said.
So what that translates into is higher yields on US dollar assets, Stanley noted.
“It’s also happening here where we are seeing higher yields on Jamaican dollar assets as the central bank has been forced to increase its policy rate to address the inflation situation,” he added.
Sterling Asset Management is a full-service financial planner, fund manager and global securities trader focused primarily on US-dollar fixed income securities. The company partners with large brokerages to connect investors with the global capital market, providing attractive returns for medium to long-term investments, including global US-dollar bonds and mutual funds.
The BOJ would have accelerated their pace of hiking – they increased their policy rate by 150 basis points to take their signal rate to four per cent, but given that the Jamaican authorities are still targeting inflation between the region of say four and six per cent, the US is targeting inflation around two per cent.
According to Stanley, what that translates into for investors is that one can expect that the value of the Jamaican dollar, given the inflation differential, is expected to depreciate on an annual basis between two and four per cent.
The stronger BOJ measures are also aimed at addressing Jamaican dollar liquidity expansion and maintaining stability in the foreign exchange market.
Stanley applauded the BOJ policy to address the situation cautioning, “They need to try and contain the inflation impulses for sure, but what I want to guard against though is the need to be ultra-aggressive in terms of trying to contain the inflation. I don’t think the central bank wants interest rates to return to the type of levels we have seen in the past — that would certainly undermine the growth the economy has enjoyed over the past few years.”
While the US authorities have not yet increased interest rates, it has signalled its intention to do so and has already significantly cut back on liquidity support for its banking sector.
“Looking at the US market, this means that there are fewer monies available to chase financial assets, so invariably with higher interest rates, asset prices are likely to fall. This includes not just bonds that have an inverse relationship to interest rates but also equities, as future cash flows are discounted at higher interest rates and result in lower valuations.”
So, generally speaking, financial asset prices will fall as interest rates rise in the US.
“But eventually, once interest rates have settled, it will also provide opportunities for investors and they will be able to acquire assets at much lower prices than they would have otherwise,” Stanley added.
Stanley advised that US-dollar investors need not worry too much about the current market volatility as markets fluctuate over time but encouraged investors to keep watch.
He continued, “As long-term investors can tell you, short term volatility does not necessarily translate into poor long-term returns. They help long-term performances because it means that when there is a pullback in the market, a long term investor can acquire assets at a cheaper value and thus improve the potential returns of their portfolios. Long term investors can ride out the downturns in the market without having to sell assets.”
When the US dollar is strong, it reflects a robust US economy. On the other hand, a weak dollar can signal an economic downturn, rising inflation, or both.
The US dollar is the major reserve currency of the world, and so it will be affected by developments in other markets.
“For instance, if there is good news in Europe then the Euro will strengthen against the dollar. It is difficult to develop an investment thesis solely based on the strength of the US dollar. Whether the dollar is strong or not, it shouldn’t deter investors from thinking about their future. I think what is more important is to determine whether or not that US dollar investment meets their hurdle rate of return rate and also compensate them for the level of risk they are about to take on,” Stanley outlined.
jamaica.loopnews.com