FX Monthly


Posted Under: Weekly updates

What Happened

  • Greenback barely changed overall as its recent appreciation subsided, pulled in mixed directions.
  • Euro declined a bit further, but Pound Sterling managed to recover half its September losses.
  • Emerging Market (EM) currencies such as MXN and BRL (Real) continued their slide.
  • Despite global recovery woes, record-high stocks have affected safe-haven assets such as JPY, now at its weakest level in four years.
  • Fed officials talked tapering but avoided setting a timeline for interest rate hikes.

GreenShootsFX’s View

  • After off-year elections in some states, expect a renewed focus on actually passing a comprehensive infrastructure bill.
  • Eyes will be on China as it reports a renewed outbreak of the coronavirus that could impact the recovery in shipping.
  • Priced-in Fed tapering and lack of guidance on future hikes could translate into another similar up-down trend this month for the buck.
  • We remain cautious of declaring any victory over COVID or its potential for more havoc.

In Focus

  • After falling to its weakest since February, CAD returned to summer highs in October.
  • Bank of Canada Governor Tim Macklem and other officials decided it was time to terminate their bond-buying stimulus.
  • The October 27th BOC meeting represented the fourth consecutive time tightening was announced.
  • 2-year Canadian treasury bond yields spiked by 27 points as the BOC is speculated to hike interest rates likely in April 2022.
  • Reserve Bank of Australia is also reducing QE and other measures to start ‘reinvesting’.

In Depth

Even the Fed admits it is difficult to have a clear outlook on the future.

As November arrived, we were curious to see how strong of a message the Fed would send regarding its will to start tapering stimulus purchases. At the time of writing, the FOMC announcement took place and seemed to disappoint dollar-bulls who expected a more hawkish tone. Instead, Chairman Jerome Powell remained signaling that inflationary growth will not spike out of control.

More importantly, he stayed away from setting any timeline about future interest rate hikes. Naturally, the immediate effect was a positive one in the stock market, which sees the Fed not wanting to intrude with the rally experienced in equities during a less-than-ideal economic recovery.

While normalization of central bank policy seems inevitable as the pandemic starts to lessen its negative impact on growth⁠—not all officials around the world share confidence in the pace at which indicators are performing. Clarity is not abundant, and there is frustration across sectors.

As prices of everything keep rising everywhere, countries like Brazil are also looking to stabilize the economic environment. Market expectations were high that the country’s central bank would address inflation via significant interest rate hikes, but officials hesitated. Central bank chief Roberto Campos Neto had explained in September there was no interest in combating inflation with more rate increments.

This was followed by their decision at the October 27th meeting to hike by 150 basis points; a move considered insufficient per most traders. As a result, BRL declined by over 7.5% in the last two months, ranking it the weakest among the majors. But, of course, the damage and high death toll caused by COVID-19 in the country continue to inflict pain as they dig their way out of a major hole.

On the other side of the Atlantic, things may not be as dire, but the European Union could also use some time for improvement before jumping on increasing borrowing costs. In fact, decision-makers are trying to make analysts’ jobs easier by simply stating that we should not bet on interest rate hikes anytime soon. The two clearest voices about this have been none other than renowned Chief Economist Philip Lane and the European Central Bank President Christine Lagarde.

Economic confidence is up in Europe, but so is inflation. Although the ECB believes inflationary pressures should ease in 2022, Spain’s Consumer Price Index figures hit the highest levels in three decades. Lagarde and other doves would point at how the ECB is already cutting its Pandemic Emergency Purchase Program (PEPP) to address the issue. Still, a lack of cohesive progress around the whole of the EU seems to be a bigger worry than the rise in the cost of living.

Some wonder how much of the dependence on a healthy China influences the forecast for an improved economy. At the same time, there is also concern with the rapidly rising costs of energy. While countries have vowed to become greener, the path toward energy independence in Europe seems to be relatively slow, and growth woes are only being exacerbated by the rise in oil and gas prices.

The ECB looks determined to avoid putting unnecessary pressures on what is still perceived as a fragile environment where it pays to be cautious. Renewable energy has a long way to go as countries like Italy have promising developments yet only manage to produce a quarter of the energy it needs for itself.

Tied to this problem of energy costs is the larger dilemma of post-Brexit trade cooperation, which bodes poorly for both the U.K. and the EU. Sterling may have found some reasons to merit slight appreciation as the U.K. government ended the public sector pay freeze. Additionally, during this week’s gathering, the Bank of England telegraphed that it is likely to hike its benchmark rate in early 2022. However, the Sterling could sink back down based on other matters.

The U.K. Office for Budget Responsibility produced a report highlighting how the British economy will shrink by 4.0% in the long run due to Brexit. It argues that the U.K. has only become less connected to the rest of the world. The pre-pandemic struggle continues between the French and English, who keep arguing over who has fishing rights in The Channel. Indeed, our years-old vision for these separation-related problems is materializing.

Looking at October fluctuations, it was interesting to note that currencies that actively improved against the dollar were many of the same ones rewarded for better handling and control of the pandemic and the havoc it wreaked. Israeli Shekel (ILS), Korean Won (KRW), and the Antipodean tender all impressed. Those countries with the heaviest death toll since the crisis began now have consecutive months of significant losses. Indian Rupee (INR), Brazilian Real (BRL), and South African Rand (ZAR) are hoping to get away from trading near their worst levels for the year.