Volatility is back in a big way in FX markets this week, and after losing nearly a percent of ground across the board in Wednesday’s trading session, the United States Dollar has dramatically reversed its fortunes and is stronger against all G10 peers with the exception of Swiss Franc.
Overview
The “US is less bad” narrative has once again regained quite a bit of steam as political turmoil around the world keeps safe havens afloat and dampens risk appetite.
Most apparent in Europe, France’s growing political uncertainty is dragging the rest of the bloc down with it and, to an extent, other European currencies as well. European stocks are heading for their worst week since October, while US equities have continued their outperformance of global peers. After the weekend’s European Parliament elections showed Emmanual Macro’s centrist coalition losing substantial ground to Marine Le Pen’s far-right National Rally party, Macron made the bold (or ill-advised) choice to call for a domestic snap election at the end of June. In the five days since this call, coalitions have been made, coalitions have fallen apart, and domestic political discord has skyrocketed. France’s electoral system functions in two rounds, and as it stands now, Macron’s centrist alliance may not even clear the hurdle to move on to the second round of voting, which is a spelling disaster. As polling suggests a large loss for the centrists, speculation has abounded that President Macron may resign should Le Pen’s party win a majority – speculation that, for his part, he has strongly pushed back on. As of now, the most likely outcome is further political discord and dissonance, potentially with a split government, for the European Union’s second-largest economy, and the fallout is spreading around the world. Such discord continues to weigh heavily on EUR, at its weakest point against USD since more than a month ago. The UK, also due for their own snap election on July 4, is also staring down the barrel of power changing hands – though not as messy as the current French situation, such a transition only adds to an air of global political uncertainty.
Inside the US, by comparison, the picture looks almost rosy as US elections remain several months away. The focus domestically is on divergent expectations of interest rates from investors versus the Federal Reserve. Markets still believe the Fed will cut interest rates twice this year, keeping US equities afloat, but the Fed itself expects to only cut once this year, by contrast, boosting the USD. The Bloomberg Dollar Spot Index is set for its fourth straight week of gains, even amidst a set of definitively cooler inflation and price data this week.
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USD ⇓
Swiss Franc, the lone winner on the G10 board against USD this morning, has added a further two-tenths of a percent onto its weekly gain and has appreciated nearly two percent against USD in the last month. As EUR and GBP continue to slide in high volatility trading, investors are searching for the relative stability provided by CHF. The currency is also posting notable gains against EUR and GBP as political uncertainty around the continent and in the UK continues to dominate headlines. Swiss franc near-dated futures soared in volume this week to reach a 17-year high ahead of the Swiss National Bank’s meeting next week.
JPY ⇓
Japanese Yen briefly slumped nearly a percent against USD overnight before clawing back some of those losses after the Bank of Japan’s Kazuo Ueda declined to give traders details on the Bank of Japan’s planned reduction in bond purchases, delaying moves to unwind its massive monetary stimulus until next month. Markets had expected such reductions to come this month, and the delay initially sent JPY spiraling before Ueda attempted to signal that an interest rate hike, in addition to bond buying reductions, may be coming next month as well. Nonetheless, Japan’s yawning yield differential with the US is keeping the flailing currency depressed.
