Markets

FX

FX markets likely to remain volatile into year-end

After rallying to its highest level of the year last week, the US dollar seems set to end this week broadly unchanged. In our view, this reflects the offsetting effects of rising short-term yields in the US (particularly after Chair Powell’s comments to Congress on Wednesday) and falling long-term yields amid growing concerns about the Omicron variant. Despite today’s mixed payrolls report, we think the bigger picture remains that sustained inflationary pressures in the US are likely to support faster policy normalisation by the Fed and keep the dollar strong. In addition to uncertainty about the Omicron variant, we expect next week’s CPI data from the US and the wide range of central bank meetings to keep volatility in FX markets elevated throughout December.

3 December 2021

Turkey & the macro fallout from past “sudden stops”

The history books show that currency crises in other parts of the emerging world in recent decades have resulted in peak-to-trough falls in GDP of around 8% on average and pushed headline inflation up by 25%-pts from its latest trough. The latest crisis in Turkey is likely to result in a downturn that sits towards the milder end of the spectrum and, so long as the lira stabilises, the peak in inflation is likely to be in the region of 25-30% y/y in the next few months.

3 December 2021

SNB’s patience appears to be wearing thin

We argued this week that the upside for the Swiss franc was limited and its inability to push past the CHF 1.04 per euro mark suggests that policymakers’ patience may already have been exhausted. We await the publication of the weekly sight deposit by the SNB on Monday to confirm our suspicions that the Bank has seen enough. But if the SNB is to avoid adding substantially to its already-bloated balance sheet, it will be hoping – like the rest of us – that Omicron fears blow over soon. Next week, we expect data to show that mainland GDP in Norway rose by about 0.2% m/m in October and that core inflation remained well below target in November.

3 December 2021
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We anticipate that the rand will remain weak

The South African rand has rallied over the past few days after reaching its lowest level against the US dollar in more than a year following last week’s news about the Omicron variant. Even if the new variant doesn’t lead to a major round of renewed virus containment measures, we think that the currency will remain under pressure from both domestic and external headwinds for much of 2022. In view of the wider interest, we are also sending this FX Markets Update to clients of our Africa Economics Service

Pandemic-era lessons for the Swiss franc

Given the uncertainty around Omicron, and the revealed preference of the SNB in recent weeks to largely stay out of the FX market, we would not be surprised to see the Swiss franc rise further against the euro in the near term. But any upside is limited, and the balance of risks is tilted towards depreciation in 2022. In view of the wider interest, we are also sending this Nordic and Swiss Economics Update to clients of our FX Market Service.

Omicron uncertainty provides a sense of déjà vu

News of the spread of the Omicron variant has put COVID-19 back at the top of many investors’ list of concerns. While on a far smaller scale, the impact on markets so far has been qualitatively similar to that during the first COVID-19 meltdown between mid-February and late March of 2020. US Treasury yields have fallen, stock markets have stumbled – with US equities holding up better than those elsewhere – and energy commodities have seen big losses.

30 November 2021

COVID throws another curveball

News late yesterday of a new and potentially more dangerous variant of COVID-19 emerging in South Africa has made a dramatic impact on financial markets today. In general, market shifts have been similar to those in previous periods of renewed uncertainty around the path of the pandemic. Risky assets and currencies have fallen across the board today, while bond yields have dropped sharply and safe havens – notably the yen – have rallied. Short-term rate expectations, which had risen significantly in the US and other DMs over recent months, have been pared back rapidly.

26 November 2021

Lira crisis, MNB hikes, Ukraine-IMF, Romanian politics

This week has been dominated by the collapse in the Turkish lira and all our research on the crisis can be found here. While Turkey’s problems have been driven by a ‘head-in-the-sand’ approach to inflation and falls in the lira, Hungary’s central bank tightened policy further this week amid signs that officials across Central Europe are taking the inflation fight more seriously and becoming less tolerant of currency weakness. Elsewhere, the early signs are that a new grand coalition in Romania does not have the appetite for much-needed austerity. Finally, the latest tranche of IMF funds provide a welcome boost for Ukraine’s economy.
Drop-In: Why is Asia sitting out the global inflation surge? 09:00 GMT/17:00 HKT, Thursday 2nd December https://event.on24.com/wcc/r/3546145/A9D34EF592141BEFCAC819ADB40359D5?partnerref=report

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