Claim Ownership

Author:

Subscribed: 0Played: 0
Share

Description

 Episodes
Reverse
The main talking point has been the move below parity in EUR/USD for the first time since December 2002. The pair teetered on the brink of parity for a couple of sessions, before falling fairly comfortably below it on Thursday. A divergence in natural gas prices across the Atlantic was largely to blame for the move, with last week’s hotter-than-expected US inflation report enough to drive the pair through the key psychological level. We have, however, seen a recovery in the euro since then, with EUR/USD moving back above the 1.02 level on rising bets in favour of a 50 basis point interest rate hike from the European Central Bank when it meets on Thursday. 
Time flies when you’re having fun. So, this is a good chance for us to look back on the first six months of the year, and talk about our main highlights in the FX market so far this year. We then look ahead, and talk about what we expect during the remainder of 2022.
The Swiss franc was the best performing currency in the G10 last week after the SNB shocked markets by announcing a 50 basis point interest rate hike - the consensus was for no change. The bank also changed its wording on the franc, no longer calling it ‘highly valued’ and saying that it would be prepared to intervene in the market on both sides.
Markets will have one eye on next Wednesday's FOMC meeting. The Fed is set to raise rates by another 50 basis points next week and signal more hikes are coming at upcoming meetings. This will be followed by the Bank of England’s latest policy decision on Thursday. But we’re going to focus first on Thursday’s ECB announcement, which delivered a long awaited hawkish pivot. In the bank’s statement, it explicitly said that it would raise interest rates by 25 basis points at its July meeting, and follow this up with another one in September.
On the whole, most economies rebounded well from the COVID induced slowdowns in 2021, as an easing in restrictions allowed for an unleashing in pent-up demand. While the strict covid restrictions are a thing of the past for most of us, a number of other downside risks to growth have materialized of late, causing markets and central bankers to fret that a slowdown could be on the cards during the remainder of the year.
We spoke on our last episode about the sharp sell-off witnessed in risk assets in late-April, which sent most higher risk currencies lower against the safe-havens, notably the US dollar. The US dollar index, which measures the currency against a weighted basket of its peers, rose to its strongest position in almost 20 years earlier in the week, as heightened global growth concerns triggered a ‘risk off’ mode in markets. The dollar has also continued to be well supported by expectations for higher US interest rates. At its FOMC meeting last week, the Federal Reserve raised rates by 50 basis points, as expected, the largest such move in more than two decades. The communications from chair Powell were again hawkish. He called the US labour market ‘very, very strong’, while once again saying that inflation remained ‘unacceptably high’.
In FX, we’ve seen a classic period of ‘risk off’ trading. The US dollar has been by far and away the best performing currency, rallying sharply against pretty much everything else. Most emerging market currencies are down, with the exception of the Russian ruble, some more than 4 or 5% in the past week alone.The major currencies have also suffered rather extraordinary sell-offs, in most cases to multi-month or multi-year lows. Two of the most notable examples, and the two currencies that we’ll focus largely on today, are the pound and the euro. EUR/USD has collapsed to its lowest level in more than 5 years, and was trading below the 1.05 level this morning. Sterling, meanwhile, is trading at its lowest level since July 2020, having now sold-off by more than 4% in a little under a week. 
For the most part in the last month, we’ve seen an improvement in risk sentiment - the safe-havens have generally underperformed, notably the Japanese yen, which has slumped to around its lowest level at any time since I started working in the FX industry, and at the release of this recording may well have fallen to its lowest level since 2002. The higher risk currencies have generally rebounded, notably the Australian dollar and Norwegian krone in the G10, while among emerging markets: the Brazilian real, South African rand and (notably) the Russia ruble have led the rebound.
Investors were caught wrong-footed by news of the full-scale invasion last Thursday, despite a host of warnings, with markets holding onto misplaced optimism that a peaceful solution could be found that would avoid conflict.In FX, almost all emerging market currencies sold-off, most rather sharply, albeit there were some exceptions (notably those in Asia, including CNY). European currencies in general have underperformed, given their proximity to the conflict and close economic ties with Russia and Ukraine.
Last week was a very eventful one of central bank announcements, with the Bank of England also holding its February monetary policy meeting on Thursday. As expected, interest rates were raised by a quarter of a percent to 0.5%, the first back to back rate increase in the UK since 2004, after rates were of course raised by 10 basis points back in December.The euro has been one of the best performing G10 currencies in the past seven days, alongside the Swedish krona. The common currency rallied by more than one percent versus the US dollar last Thursday to back above the 1.14 level after ECB President Christine Lagarde struck a hawkish tone during the bank’s press conference. 
So far in 2022, we have seen a broad rebound in most of these EM currencies, many in excess of 3% in less than 3 weeks - including the Brazilian real, South African rand and Hungarian forint. Now, while part of this recovery has to do with the broad weakness we’ve seen in the US dollar, we’ve also seen a general rebound in risk appetite, which has helped support these higher risk currencies.The US dollar has depreciated against most of its peers so far this year. The dollar is currently trading as the worst performer in the G10 year-to-date, followed closely by the Australian and New Zealand dollars. 
The main talking point in recent months has undoubtedly been the recent sharp increase in global inflation, driven largely by an unleashing of pent up demand and acute supply shortages. Price growth has continued to far exceed expectations of both central bankers and economists. Citibank’s G10 Inflation Surprise index, for instance, rose to a fresh record high in December. The detection and aggressive spread of the omicron variant of COVID-19 has triggered a few jitters among market participants. A number of countries, particularly in Europe, have tightened restrictions over the holiday period, which has raised a few concerns over global growth. The likes of Germany and Portugal have introduced post-Christmas curbs, while the Netherlands remains under a fairly strict lockdown. 
We’re going to start by talking about the most traded and popular currency pair in the foreign exchange market, and that is of course EUR/USD, which has been on a rather volatile ride in the past fortnight. The cross began November around the 1.16 level, although it has since fallen sharply and is down about 3% month-to-date to below the 1.13 level and its weakest position since July 2020. As far as the euro is concerned, the common currency has been met with multiple headwinds. The European Central Bank has remained one of the more dovish central banks in the G10, while investors are growing concerned about the recent increase in virus caseloads in the bloc in the recent weeks.
More than half of the major G10 central banks have announced their latest policy decisions in the past couple of weeks. The Bank of Canada abruptly ended its quantitative easing programme, much sooner than the market expected. The Reserve Bank of Australia held policy steady, although indicated that it could raise rates sooner than it had previously outlined. While Norges Bank indicated that it was on course for its second pandemic era rate increase at its December meeting.We’re going to focus on the latest policy announcements from the European Central Bank, Federal Reserve, and Bank of England, which have all met since our last podcast episode.
The main talking point in financial markets continues to be the sharp increase in inflationary pressures globally. This has caused investors to both fret that a slowdown in global growth could be on the cards in Q4, and also raised expectations for central bank interest rate hikes. 
The Real remains one of the most volatile emerging market currencies that we cover, with levels of implied probability that exceed just about all of its regional peers. BRL sold-off aggressively at the start of the COVID-19 pandemic, falling to a record low of around 5.9 to the US dollar. The currency stabilized in the second half of last year and has largely held its own versus a broadly stronger dollar in most of 2021 so far.It has, however, sold-off again in the past 3 months or so - down around 10% since the end of June. This makes the Real the worst performing currency in the EM spectrum during that time, despite the ongoing interest rate hike cycle from the Central Bank of Brazil - which has raised rates by 425 basis points since March. 
Investors appear slightly torn between renewed optimism surrounding the pandemic and concerns surrounding the recent stagflation narrative, whereby many economic areas are seeing rising consumer prices, coupled with slower growth. Following the recent sharp increase in US inflation and robust labour market performance, investors have braced for an announcement that the Fed will soon begin tapering its large scale quantitative easing programme at some point this year. Also Germans will head to the polls on Sunday 26th September, and we’re set for a fairly significant political shift, because after 16 years in office, Chancellor Angela Merkel will be stepping down as Germany’s leader. 
Listen to what our analysts have to say about the latest FOMC policy meeting and what they expect from the financial markets in Augusta and early September. 
It is been a period that has been largely characterized by ‘risk off’ trading. If we look at the FX performance tracker for the past month, the three best performers in the G10 have been the traditional safe-havens. The swiss franc, Japanese yen, and US dollar - in that order. Meanwhile, the higher risk currencies, including the Norwegian krone and Australian dollar, have largely underperformed.This has a lot to do with the aggressive spread of the delta variant of the COVID-19 virus around much of the world. We’re seeing relatively sharp increases in infection in many nations, including some of the major ones. The real cause for concern is the sharp uptick in contagion witnessed in those nations that have so far lagged behind in vaccinations.
We’re going to start this episode by talking about Friday’s nonfarm payrolls report - the impact it had on the market and our general thoughts I guess on the strength of the US labour market.Most currencies, particularly the major ones, spent much of it within rather narrow ranges amid a lack of significant newsflow. On Friday, however, we did see some volatility following the release of the monthly US nonfarm payrolls report.
Comments 
Download from Google Play
Download from App Store