This week saw three of our key calls begin to play out in FX markets. First, that strong US data would eventually translate into more hawkish Fed expectations, and as a result, dollar strength. Second, that other central banks would begin signalling faster easing paths than markets had priced in light of weak domestic conditions, leading their expected rate paths to finally begin diverging from those of the Fed, having moved in lock step so far this year. Third, volatility began to resurface in markets, as year-to-date ranges across a multitude of dollar pairs were broken and options markets awakened to the prospect of a more turbulent Q2 for markets. All told, this meant that the week finished with the entirety of the expanded majors closing in the red against the dollar. Markets remain on BoJ intervention watch with USDJPY trading north of 153, while sterling, euro and the loonie were left to plumb depths not seen since last November. That said, EM FX found itself more insulated from these moves. In Asia, the PBoC’s soft USDCNY peg combined with BoJ intervention concerns to stymy the worst of any selloff, whilst in Latin America, inflation developments meant that both Banxico and the BCB are likely to remain relatively cautious in easing policy this year, protecting their currencies from any significant depreciation. Given these developments, and the queries they have raised across our front office, we have dedicated this week’s look ahead to answering some of the burning issues that have been raised, and what we think they mean for FX markets going forward.
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Authors:
Simon Harvey, Head of FX Analysis
María Marcos, FX Market Analyst
Nick Rees, FX Market Analyst