Forex Investment and Currency Trading

Market continues to believe that the Fed will remain on hold, as downside growth risks remain important.

Volatility in interest rate space has increased macro uncertainty….which is likely to exert upward pressure on equity market volatility.

Equities also likely to feel the pain as central banks talk tough and cyclical picture remains weak

Market continues to believe that inflationary pressures will moderate later in the year as slack emerges and commodity prices stabilise…

…However in the near-term equity markets are likely to face significant challenges from the macro front.
Global equity markets continued to come under pressure yesterday with SPX and DJ Stoxx shedding 0.24% and 0.68% on the day as oil producers suffered on the back of the pull back oil prices. Crude itself had a parabolic day with WTI trading near $138/bbl earlier in the session before falling to around $132/bbl.

In FX space, the Dollar continued to trade with a firmer tone, helped mainly by the ongoing repricing of US rates on the back of inflation concerns, and shift in the Fed’s priority weighting.

The Dollar has now gained around 2% on average versus CAD, JPY and AUD since the more Dollar supportive comments started to hit the wires early last week. Versus the Euro, the Dollar has gained more moderately over the same period (around 0.5%) as the US policy push has largely been countered by a more hawkish ECB. Short Dollar position has run into significant headwind, not only from the continued more Dollar supportive comments from the US Treasury, but potentially more importantly from the
emerging shift in inflation focus within the Fed.

Elsewhere, there were two important developments in global FX. First, the Russian Rouble moved stronger than the previous strong end of its trading band versus the basket. Continued upside risk for the RUB is in the near-term. Second, the central bank of Chile hiked rates by 50bp. This may help stabilize the CLP, which had been under pressure from rising inflation expectations lately.

The theme of central banks toughing their stance continued as the Bank of Canada surprised market by keeping the overnight rate at 3%. The extent of the surprise is illustrated by the fact that one of the 30 forecasters polled by Bloomberg expected rates to be kept on hold, and the market was nearly fully priced for a 25bp cut. The bottom line is that easing cycle is over, 25bp earlier than market had anticipated – barring major shocks to the BoC’s forecast. But market still thinks tightening is still some way off, and do not expect any rate changes for the remainder of the year.