FX Markets

FX Markets Weekly Wrap

FX Markets Weekly Wrap

COVID throws another curveball

News late yesterday of a new and potentially more dangerous variant of COVID-19 emerging in South Africa has made a dramatic impact on financial markets today. In general, market shifts have been similar to those in previous periods of renewed uncertainty around the path of the pandemic. Risky assets and currencies have fallen across the board today, while bond yields have dropped sharply and safe havens – notably the yen – have rallied. Short-term rate expectations, which had risen significantly in the US and other DMs over recent months, have been pared back rapidly.

26 November 2021

FX Markets Weekly Wrap

Continued dollar rally looks increasingly likely

The US dollar is set to end another week higher against nearly all major currencies. To a large extent, this latest rally appears to be driven by the rise in short-term government bond yields in the US relative to other major economies, notably the euro-zone. And today’s news about renewed lockdowns in parts of Europe has reinforced growing concerns about the pace of the global economic recovery. Given our view that global growth will continue to slow and inflationary pressures in the US will prove more sustained than widely anticipated, the backdrop remains favourable for the dollar to strengthen further. Indeed, the minutes of the FOMC’s last meeting (due Wednesday) could lend support to this view.

19 November 2021

FX Markets Weekly Wrap

Dollar rally may have further to run

The US dollar has continued to grind higher against major currencies following the release of US inflation data on Wednesday, with the DXY index reaching its strongest level in over a year. Recent data, in particular the strong inflation figure this week and payrolls last week, have prompted investors to expect additional hikes from the Fed next year, which has been further reinforced by hawkish comments from Vice Chair Clarida early this week. Our view remains that expectations of earlier hikes by the Fed are overdone, but that the likelihood of the Fed tightening policy in 2022 – and further dollar appreciation – is growing.

12 November 2021
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FX Markets Weekly Wrap

Dollar rallies & sterling drops on confusing BoE messaging

After another week of wild swings in short-term interest rate markets, the US dollar is ending the week stronger against most major currencies. On a trade-weighted basis it is now near its strongest level since last November. Neither the Fed meeting nor the stronger-than expected non-farm payrolls report proved decisive – indeed, the Fed’s policy statement was, if anything, on the dovish side. But whereas Chair Powell was somewhat ambiguous in his remarks, policymakers elsewhere pushed back more forcefully against the policy rate paths discounted in money markets. This led to broad-based drop back in near-term rate expectations, but also a swing in rate differentials in favour of the dollar against a few currencies, as US rates fell by less than those in some other economies.

5 November 2021

FX Markets Weekly Wrap

Currencies stay mostly calm amid carnage in bond markets

Currency markets remained remarkably stable for most of this week, although the US dollar is rallying sharply today on the back of data showing very strong wage growth in the US, even as a major reassessment of the pace of monetary policy normalisation in developed economies led to a sharp sell-off in short-dated government bonds and interest rate contracts. The ECB and the BoC both delivered hawkish messages at their respective policy meetings, continuing a trend among major DM central banks. But while interest rate expectations rose and both the Loonie and the euro gained in the immediate aftermath of those policy announcements, neither has held on to those gains.

FX Markets Weekly Wrap

US dollar edges lower ahead of next round of CB meetings

With a couple of exceptions, currency markets have had a quiet week; the US dollar is ending the week a touch weaker against most other currencies, but in aggregate it remains close to its strongest level for the year. With US bond yields continuing to rise and expectations for Fed rate hikes in the second half of next year solidifying, we think the dollar will remain strong over the coming months. The upcoming week kicks off the next round of central bank policy announcements, with the ECB and the BoJ (neither of which we think will alter their policy settings), as well as the Bank of Canada, (which we expect to signal the end of its balance sheet expansion). To the extent that next week reinforces the widely held view (which we share) that the ECB and BoJ will remain well behind other central banks in normalising policy, it may add to downward pressure on the yen and euro.

FX Markets Weekly Wrap

US dollar falls back as Treasury yields edge down

The US dollar seems set to end the week lower against most currencies, as “risky” assets have rallied and US Treasury yields have edged down a bit. This fall back in the dollar and US yields is somewhat surprising in light of the stronger-than-expected inflation data released Wednesday. But we think those data add to evidence that inflationary pressures in the US remain strong, and will gradually push Treasury yields, and the dollar, higher. And while this week’s rebound in risky assets suggests that concerns about the global economic recovery are fading, the latest activity data from China and the US (due on Monday) are likely to set the tone for FX markets next week.

FX Markets Weekly Wrap

Dollar rally loses steam following weak payrolls data

Despite the rise in US Treasury yields this week, the US dollar reversed some of its recent gains after today’s labour market data were somewhat weaker than expected. But given strong wage growth, we doubt this will alter the Fed’s policy path. Indeed, US inflation data released next Wednesday may add to evidence that inflationary pressures are proving less “transitory” than generally anticipated. Our view remains that this will push US yields and the dollar a bit higher in the coming months.

8 October 2021
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