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.
Jonas Goltermann Senior Markets Economist
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FX Markets Weekly Wrap

Fed guidance could revive the rally in the US dollar

The trade-weighted US dollar seems set to end the week a bit higher, reversing some of its recent decline. But the dollar strength has mostly been against G10 currencies; despite the fall in US equities this week, the “riskier” emerging market (EM) currencies have generally risen. We doubt this pattern will last, as we expect tighter financial conditions from rising US Treasury yields to put renewed pressure on most EM currencies. Indeed, we expect the Fed to signal a rate hike in March and an accelerated pace of quantitative tightening when it announces policy next Wednesday, which could prove the next catalyst for a stronger greenback.

21 January 2022

FX Markets Outlook

We expect the dollar bull market to continue

Although the dollar’s rally has stalled over the past six weeks or so, and may tread water for a while longer, we think that it will ultimately appreciate a bit further this year and next. The key driver of the greenback’s rise since the middle of last year has been the Fed’s increasingly hawkish stance in response to a robust economic recovery and surging inflation pressures in the US. We expect that the Fed will deliver at least as many rate hikes as now discounted in money markets, and a significantly more aggressive pace of “quantitative tightening” than in the previous tightening cycle. In contrast, we think many other central banks will fall short of the pace and/or extent of monetary tightening that investors now appear to expect. In other words, we anticipate that rate differentials will continue to shift in favour of the greenback. We also think that the Fed’s apparent desire to tighten financial conditions in the US (which, if successful, would almost certainly affect global conditions) will continue to keep riskier currencies, especially in emerging markets, under pressure.

20 January 2022

FX Markets Weekly Wrap

We do not expect the recent dollar weakness to last

Despite several events in the US this week which would usually point to a stronger dollar – the highest US inflation print since the early 1980s, hawkish comments from both Chair Powell and Vice Chair Brainard, and a sharp rise in short-dated government bond yields relative to those in most other countries – the greenback fell this week. We think there are several possible explanations, including rising commodity prices, rotation out of the US tech sector, stretched long dollar positioning, and the fact that US money markets have already priced in a fairly aggressive rate path.

14 January 2022

More from Jonas Goltermann

Capital Daily

Rising US rates bigger worry for EMs than Turkey contagion

Turkey’s currency crisis – the lira is down another ~11% against the US dollar today, and ~35% in two months – is now reaching a scale where it raises the question of how badly it will affect other economies and financial markets. Overall, our view is that the risk of direct contagion from Turkey looks limited, but that the global backdrop for emerging markets is worsening.

23 November 2021

Capital Daily

What to make of renewed COVID concerns

The news that lockdowns are once again being imposed in parts of Europe puts COVID-19 and its impact on economic activity and financial markets back into back into focus. While predicting the course of the pandemic is as tricky as ever, the past eighteen months arguably provide some guidance as to how a worsening outbreak would affect markets.

22 November 2021

FX Markets Chart Book

US dollar bull market might just be getting started

The dollar has risen to its strongest level in more than a year and, though it is not our central forecast, we think the risk of a more sustained dollar bull market is increasing.

19 November 2021
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