Despite a Full Slate of Economic News, Major Currencies are Mostly Unmoved for Now
The euro, sterling and yen remain confined to their recent ranges, while the Australian and New Zealand dollars succumbed to selling pressure.
The euro, sterling and yen remain confined to their recent ranges, while the Australian and New Zealand dollars succumbed to selling pressure.
The media has pounced on a report from SWIFT, the international messaging platform for financial transactions, which showed a rise in the use of the Chinese yuan to record levels. According to SWIFT, the use of the yuan surpassed the Australian and Canadian dollar to move into fifth place.
The US dollar is sporting a slightly softer profile, but the price action is really more of a consolidation than a trend reversal. The euro has gained nearly 0.5% today but remains below last Friday’s high of about $1.1375.
The US dollar extended its gains against all the major currencies and most emerging market currencies over the past week. The ECB’s asset purchase program was a key driver, but the euro, though it fell a little more than 5.5 cents from the mid-week high to Friday’s low, was not the weakest of the majors. That distinction goes to the dollar bloc.
The market is still trying to make sense of yesterday’s bombshell by the Swiss National Bank to abandon its franc cap, affirmed as an integral part of central bank’s monetary policy a few short days ago. Not only did this take market participants by surprise, but also apparently the IMF and the ECB.
The US dollar turned in a mixed performance during the first week of the New Year. It fell against the Antipodeans and yen but rose against the other major currencies. The dollar’s performance against emerging market currencies was similarly mixed. It rose against most but fell against the major non-restricted currencies, like the Turkish lira, the Mexican peso, and the South African rand. Most importantly, the dollar finished the week on a soft note, and we expect this to continue into the week ahead.
The US dollar is poised to extend last year’s rally. The US economy is at least several quarters ahead of most of the other major economies. Barring a major surprise, the Federal Reserve will likely hike rates around the middle of the year, while the economies in Europe and Japan need more stimuli.
At best, it is the holiday season when hopes and wishes abound. It may be as it was for Ebenezer, “an undigested bit of beef, a blot of mustard, a crumb of cheese, a fragment of undone potato.” At worst, it is spiked eggnog and the peppermint schnapps.
How else could reasonable people, like former ECB President Trichet, say that there is a “window of opportunity” for a new agreement on foreign exchange among the major high-income countries? Other economists go further and fancifully include China too in a new global accord.
The holiday-shortened week has begun. Some causes of consternation have eased. Oil prices are firmer after the pre-weekend recovery. The Russian rouble, where the focus has been greater than the exposure, has continued to recover following signs that China may be willing to offer it more assistance. It is up 5.4% to bring its two-day recovery to 9%. Rosneft spurred pressure on the rouble trying to secure $7 bln for debt repayment. After it made the payment, the selling pressure on the share price and the rouble eased considerably.
The powerful divergence theme re-emerged and effectively ended the dramatic correction throughout the capital markets. The FOMC statement strengthened conviction of a mid-2015 lift off, even if the pace of tightening may be somewhat slower than previously anticipated. At the same time, the Swiss National Bank’s decision to move to negative interest rates, partly in anticipation of the ECB expanding its asset purchases as early as next month, underscores that Europe remains well behind the US in the credit cycle.