FX Market View #25

From the beginning of last week, the global markets were depleted of any sustainable risk appetite as the news from the collapse of China’s Evergrande was absorbed. This lifted the Dollar as investors sought safe-haven assets to protect investment portfolios against further downside pressure. As a consequence, the initial Dollar sell-off following the FOMC meeting slowed and eventually reversed with the markets rallying behind the greenback. Uncertainty of the Fed’s plans towards tapering the economic stimulus is now clearer than over the past week or so. The market is now factoring in the likelihood of a US rate hike during the middle of next year. This then opens the possibility of a second hike by the end of 2022.

On the global scale the Fed is lagging other high income countries when it comes to raising interest rates. The first country to lead the way was Norway and now New Zealand is also following suit. Other major central banks such as the ECB, BOJ and SNB are notably behind their G10 counterparts, however, they are signalling the slowing of their quantitative easing programs. The ECB’s Pandemic Emergency Purchasing Program is scheduled to wind down at the end of the first quarter of next year. And Japan’s central bank is following a similar trajectory with its intention to taper its bond and stock buying policy. Therefore the next central banks to increase rates again will most likely be from Canada and the United Kingdom.

When looking at the singular view of interest rate policy and the standing of central bank, it is not surprising that Sterling and the Canadian Dollar are the most resilient. The Dollar has also begun the week on a strong footing, holding its own against most of the major and emerging currencies. Rising US yields have contributed towards a stronger Dollar, particularly against typical funding currencies such as the Japanese Yen. European yields are slightly higher this week, however this could not give any support to a softening common currency. As for the Australian Dollar it is sitting steady in the upper end of last week’s range. Near term gains appear to be insight for the Aussie, nevertheless this is following a sell-off period which started nearly three weeks ago.