FX Monthly


Posted Under: Weekly updates

What Happened

  • The year started with turbulent markets after Omicron caused economic uncertainty.
  • Mixed moves throughout the month ended in a tight 0.3% uptick for the buck, per the Bloomberg Dollar Spot Index.
  • The MSCI Emerging Markets Currency Index managed a second consecutive month of gains, anchored by BRL and ZAR.
  • The Federal Reserve said it will hike rates, but there is doubt about how many will materialize.
  • End of the month was characterized by a greenback in steep decline.

GreenShootsFX’s View

  • The confidence behind the Fed’s ability and willingness to increase interest rates will start to fade with underwhelming indicators.
  • Expect more talk about the repercussions to the global economy if relations do not improve between Russia and the West.
  • Banxico meets on Feb. 10th and is expected to hike interest rates; Peso might climb.
  • Hoping there is no regression in the battle against COVID, which is entering its third year of disrupting global commerce.

In Focus

  • Dollar strengthening hit the brakes as tightening plan gets underway.
  • The buck climbed to its best levels since Thanksgiving only to flounder it all in the last few days of January
  • Omicron’s impact on the fourth quarter continues to be digested as it seems labor was affected after a return to safety measures
  • The Federal Reserve sounded more confident at the end of December than in their meeting
  • We warned in the 2022 Currency Outlook about chances for central bank indecisiveness

In Depth

Markets rattled with mix of hawkish and dovish thinking. 2022 still lacks clarity after central bank meetings and a bipolar January.

It looked like the worst January ever for stocks on record and then a big rally saved the month. December ended with Omicron seeming a pain to markets, but also with the idea that the upcoming year would be one meriting an increase in borrowing costs. This combination made for a big dip in equities as investors assessed that the era of easy money would come to an end and that 2022 would be marked by a battle against inflation requiring higher interest rates.

Although it looks like the Fed is confident, not every central bank nor central bank member is thinking that stimulus must be taken away from a fragile financial environment. Policy divergence sure seems like a positive development for greenback appreciation, but the will to tighten may bend down the line.

While plenty of attention has been paid to the significant increase in the prices of everything, the focus has once again turned to the ability of the labor sector to sustain the shocks that COVID has thrown at it. Plenty of businesses across various industries still complain that they cannot fill positions and that offers are not being accepted by chosen candidates.

What is more meaningful, is that there is a disturbance in payrolls being added, with the ADP Employment Change figures for January turning out in the negative. While December saw a creation of 776K jobs, January’s data came in at (-301K) vs. an estimate of 180K. It represented the biggest drop since the virus reached our shores.

We maintain in mind that Fed Chairman Jerome Powell’s main goal is to achieve full employment and to experience healthy growth, so we wonder if he will back away from hiking all three to four times this year if he perceives those goals are at peril. Q4 did impress with its Gross Domestic Product advance as the pace of growth registered at 6.9% over the 5.5% expected. Nevertheless, Powell’s talking points stick to reminding folks that he does not see the good run of 2021 matching what may occur this year.

It will be a short month, but any word from Fed officials will be important as the end of last month witnessed a number of monetary policymakers talk down the Fed’s willingness to tighten too quickly. Purchasing Managers Index figures revealed a fall from the higher reading in December, when it looked that surveyed businesses were more willing to invest in production costs. If we start receiving signals that the Fed could delay its actions, the buck could sink dramatically, especially after increased bets that the Fed would go as far as executing five rate increments, something we totally disagree in foreseeing.

During his press conference, Powell displayed a sense of cautious optimism while admitting that the very worst of the pandemic is indeed (very likely) behind us. However, we interpreted his responses to direct questions about the timeline of hikes as ambiguous, non-committal, as in desiring to leave room for changing his mind and staying flexible.

Over across the Atlantic, the U.K. is going through a period of lifting rates to fight inflation as well. Certainly, the 5.4% Year-on-Year Consumer Price Index that came out for December gave the Bank of England the approval nod for starting to hike interest rates in December.

Additionally, the economy grew more than economists had thought with a November 3-month measure of GDP growth better than anticipated at 0.9%, more than double the 0.4% estimate. At the time of writing, the BOE went ahead with another 25-basis-points hike, bringing its benchmark rate to 0.50%.

Unfortunately for Pound-bulls, Sterling did not experience a major bounce following the move because Governor Andrew Bailey smacked down talks of increasing rates by 50-basis-points down the line. According to him, any further increments will be gradual, and markets should not count on too many of them as they currently seem to be pricing in. Something to still pay close attention will be the political pressures faced by Prime Minister Boris Johnson, who remains under a microscope for attending parties and allegedly holding events that violated COVID rules set in place for all in public office.

In the Euro-zone, we have been hit with the potential for havoc if a conflict between Russia and Ukraine unfolds. Plenty of phone calls have been reported between leaders of NATO nations and Vladimir Putin to try amending the disagreements. Russia has been warned that economic sanctions against them could be catastrophic. With energy costs on the line and ever increasing, the European Central Bank is starting to feel real pressure to address inflation.

This may have led to a more hawkish ECB press conference than most expected. ECB President Christine Lagarde explained that her colleagues agreed that it is no longer sensible to exclude an interest rate move in 2022. This switch in mentality produced the biggest Euro advancement within a day since March 2020. It is possible our forecasts for Euro-rallies could keep going with Italy’s government stable and chances for peaceful EU prosperity.