USD is trading at or just off multi-month highs for the vast majority of G10 crosses this morning while markets attempt to digest shifting expectations from global central banks..
Overview
The Bloomberg Dollar Spot Index is on track to close its best week in over a year this morning as rabid strength from the United States Dollar continues to ravage markets. Geopolitical risk is once again at the forefront of many traders’ minds – breaking news this week has focused heavily on the potential for a hot conflict between Israel and Iran. Though it’s more likely that a proxy attack would take place against Israel from Iran rather than a direct strike, the Middle East at large is clearly bracing for a larger conflict. Commodity prices, oil prices in particular, are substantially higher this morning, and gold has hit yet another record high. After a remarkably calm start to this still-young year, volatility has returned to FX markets in a big way, and thus far, USD is winning out.
Interest rate swaps, too, have shifted substantially in the last week, and markets now believe that the Federal Reserve will be the last G7 central bank to cut interest rates. Thinking back to the end of last year, when many traders were betting on the Fed to cut interest rates as many as seven times to total 175 basis points of easing this year, new expectations of just 60 basis points of easing do amount to quite a remarkable shift in just three months. The Fed itself has not adjusted its call for 75 basis points of easing, but as this week’s CPI reading for March showed, there is substantially more risk that inflation remains hot in the US, which may force the Fed’s hand. As it stands now, the European Central Bank has set the stage rather firmly for a first cut in June, and the Fed may not move until as late as September. US election dynamics through the fall may come into play as well – any cuts in or around November could easily be seen as politically motivated, something Jerome Powell has striven to avoid in his tenure so far. All told, there seems to be little in the way of the Dollar’s runaway strength for the week – geopolitical dynamics and US economic exceptionalism are creating a sort of ‘perfect storm.’
What to Watch Today…
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EUR ⇓
The single currency slipped this morning to its weakest price against USD since early November of last year after the European Central Bank held its key interest rates steady yesterday morning. Christine Lagarde, though not in so many words, essentially solidified market expectations that the ECB will cut interest rates starting in June in order to stimulate economic activity in the bloc, and the Fed looks likely to hold rates higher for longer, driving EUR prices down. Euro is also at risk of further downside because of the region’s physical proximity to increasingly ugly conflicts throughout the Middle East.
MXN ⇓
Though the Mexican Peso has still outperformed its peers this week, the currency of our neighbors to the South has still fallen victim to relentless Dollar strength and has slipped off of its multi-year highs seen earlier this month. Mexico’s close economic ties to the US have allowed its currency to move closer to in tandem with USD than its LATAM and EM peers, but central bank path uncertainty as of late has dinged the so-called ‘super Peso.’ If the Fed holds interest rates steady for longer than previously anticipated, we expect MXN’s losses to be smaller than those of its peers.
