Global Forex Market Seen As Prime Means Of Negotiating Central Bank Policy Differences In Pandemic Era

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In a world filled with many uncertainties, the nearly $ 7 trillion per day currency market is considered perhaps the best place to negotiate the divergent policy directions of central banks around the world in the era of the Delta delta. the pandemic.

Friday’s US employment report, weaker than expected for August, maintained expectations of a Federal Reserve announcement to cut bond purchases this year, but raised many questions about the strength of the economy. This doubt has put downward pressure on the US dollar at a time when uncertainties about the delta variant of the coronavirus and its impact on global economic growth remain high.

Currency players – who are by nature keenly aware of what happens every day, all over the world – are used to occasional periods of short-term uncertainty, during which they assess which regions will hold up better than others. . What’s unique this time around is that the lack of clarity comes as central banks around the world intend to end around 18 months of extraordinary stimulus – albeit in a less than way. uniform.

“The variant created more unknowns and an environment we’re not used to,” said Hans Jacob Feder, global head of foreign exchange services at London-based MUFG Investor Services. “When and how we recover are some of the questions that arise, and there are a lot of assumptions about what will happen next. How to interpret the data before COVID-19 was easier. Now it’s not that clear, people change their minds more quickly. In FX there is probably going to be quite a bit of volatility. “

Even as volatility increases in the future, the global currency market – which operates 24 hours a day – may still be the number one avenue for finding huge trading opportunities, some say. Markets such as bonds, investment grade credit, and even stocks are all valued for ‘blessing’ economic outcomes, as the currency market ‘is changing’ around the delta variant – exhibiting advantages in some. parts of the world, according to Oliver Williams, portfolio manager of emerging market debt at Insight Investment, which manages more than $ 1,000 billion.

Much of the state of flux in the foreign exchange market is related to the different stages countries find themselves in when it comes to immunizing their populations, in addition to the divergent paths taken by central banks when it comes to the withdrawal of stimulus measures and rising interest rates. again. The Fed, for example, is taking a relatively slower approach to tightening policy given the need to assess improving labor market conditions. More inflation-focused central banks, like Mexico’s, have raised interest rates more urgently.

“Central banks all move at varying rates, but with more conviction to reverse policy,” said Mazen Issa, senior currency strategist at TD Securities. “Emerging markets are further along in the policy tightening cycle, and this has lent itself to good performance for some emerging market currencies. But Fed policy may be about to change, and that dynamic could become more fluid. “

With inflation continuing to remain high globally, emerging markets are the places where the pressures triggered by the pandemic are likely to be amplified and central banks are most likely to increase.

An example: when the central bank of Chile doubled its overnight key rate on August 31, the Chilean peso CLPUSD,
-0.94
peaked a month the next day. A decision of Brazil raising rates in August – in order to control inflation – gave a short-term boost to real BRLUSD,
-1.62%,
although a movement by Mexico last month failed to trigger a bullish reaction from the MXNUSD peso,
0.06.
Meanwhile, Russia’s rate hike in July raised the ruble RUBUSD slightly,
0.08
in the days that followed.

Conversely, in the small developed country of New Zealand, an unexpected delay in a widely anticipated rate hike last month – following a pandemic-induced lockdown – caused the NZDUSD kiwifruit to drop suddenly,
-0.03%
before recovering.

The US dollar DXY,
+ 0.22%
has been more or less stable since mid-June, when Fed officials embarked on a debate about slowing their bond purchases – the pre-upward step. Meanwhile, the euro EURUSD,
-0.24%
is stable against the dollar over the same period, with investor bets that policymakers at the European Central Bank will also decline, perhaps this year.

Read: European bond yields rise thanks to bets on ECB tapering

“Everyone is waiting for clarification on the pace of the Fed’s cut,” Williams of Insight Investment said by phone from London.

Emerging countries like Brazil, India, Indonesia, South Africa and Turkey, he said, “may withstand a waning surprise better than they did in 2013” – when Discussions about withdrawing bond purchases by former Fed Chairman Ben Bernanke led to a sudden rise in long-term Treasury yields.

Insight Investment took long positions on the Turkish lira TRYUSD,
-1.21%
and the Brazilian real in the middle of this year, and also like the Peruvian sol and the Colombian peso COPUSD,
-0.37,
according to Williams. All four currencies are “cheap” relative to long-term valuation metrics and exchange rates, and emerging market currencies generally offer many more investment opportunities than advanced economies, such as the United States. and Europe, where inflation could dissipate without a radical reversal of monetary policy.

The firm remains cautious on most Asian currencies, with the exception of the Indian rupee INRUSD,
-0.51,
whereas the region’s tendency to lock in economies due to the delta variant will affect growth, the portfolio manager said.

“The pandemic has been a great equalizer,” said Amarjit Sahota, currency strategist and executive director of foreign exchange service provider Klarity FX in San Francisco. “Everyone was affected and now you see different responses to removing policies, depending on which savings came out the fastest.”

Shortened week ahead

Financial markets ended the week on mixed US equity indices, with the Nasdaq Composite Index COMP,
-0.27%
registering its 35th record at the close of 2021 and the S&P 500 SPX,
-0.07%
and Dow Jones Industrial Average DJIA,
-0.07%
limp lower. Most yields edged up on Friday, with 10- and 30-year rates seeing their biggest two-week rise in months, with bond traders focusing on the positives in August’s employment data.

Considering Labor Day in the United States on Monday, the shortened upcoming week in the United States contains a lack of important data that may be of interest to forex traders. Wednesday brings the July job postings and the Fed’s Beige Book report. Weekly jobless claims are released on Thursday, while the August producer price index is due on Friday. The Kroger Co. KR,
+ 0.08%
is the only S&P 500 company to report earnings next week.


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