FX Market View #24

A slew of central bank meetings in the week ahead will keep the markets engaged in monitoring the currency majors. Specific attention on Dollar strengthening as the market looks for potential trending patterns to emerge. All in all, there will be a release of policy data from 13 different central banks, divided across six major and seven emerging markets. The most significant data release to the global economies will be from the FOMC, however Norway’s central bank can steal some of the limelight. Since the pandemic struck over two years ago, Norges Bank would be the first high-income nation to raise interest rates. It will not surprise that the UK may follow suit behind Norway, however other G10 nations including; Sweden, Switzerland, Japan and the US are lagging behind.
 
The impact on the currency markets has been a pattern of strengthening from the Dollar. Coupled with a speculation of a hawkish tone from the Fed and surprisingly upbeat retail sales data, the Dollar continued its trend from the end of last week. Despite lower jobs growth in August and inflation remaining stubbornly elevated, the Fed rhetoric towards a path of tapering by the end of the year remains intact. However, making a connection from tapering to even a modest rate hike is still one step too far. The Dollar is still the major gainer for the week, advancing more significantly against the emerging currencies. Against the other majors, the currencies from nations which are lagging the rate hike recovery such as; Switzerland, Sweden and Japan are on the slide.
 
Another factor contributing towards a stronger Dollar is the fact that market risk is slowly waning. The lower levels of risk appetite throughout the financial markets since the end of last week, has adversely impacted the broader markets. Equity markets are on the decline, as well as global interest rate yields. Only the Yen and Swiss Franc are remaining firm, however this is mostly due to their status as a funding currency. Other G10 currencies are sliding under these market conditions, most notably the Aussie Dollar and Scandies. Unexpectedly, precious metals are not picking up the slack as investors seek alternative assets during periods of softer equity and yield markets. Other commodities such as oil and gas have pared recent gains.

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