Despite August historically being a quiet month for markets, this year was an exception. Rising Covid-19 cases globally, but specifically within the APAC region, resulted in markets pricing in a lower global growth outlook, while central banks provided greater clarity on their path for monetary policy. Specifically, the Bank of England outlined its thresholds for when interest rate hikes will result in quantitative tightening and Fed Chair Powell pushed back market expectations with a dovish Jackson Hole speech. Overall, the month was a bit of a rollercoaster ride for the broad dollar. The DXY index closed the month out 0.56% higher after retracing gains in excess of 1.75% mid-month.
The decline in the broad dollar towards the end of the month meant that Monex retained strong rankings over the 1-month horizon for select currencies, especially within the EM space where the dollar’s decline was relatively larger following Powell’s speech.
Over the medium-to-long run, Monex’s longstanding view of dollar weakness didn’t filter through to all forecasted currencies, however, top-10 results were still awarded due to our more moderate bearish view on the greenback relative to consensus.
Over the near-term, top 10 Reuters rankings within the G10 space were relatively sparse. This was largely due to an overly bearish EURUSD call, which sat in the money until eurozone and US spreads narrowed, along with an overly bullish view on the risk rally. While risk-on pricing occurred following Powell’s dovish Jackson Hole speech, as we expected due to our view that the tapering timeline wouldn’t be announced until at least November’s meeting, rising Covid cases meant that the rally occurred from a much higher DXY base.
Our more conservative AUD view meant that we retained our top 10 rankings over the 1-to-6-month horizon.
The decline in the broad dollar, and limited upside in US Treasuries following Jackson Hole, meant our expectation of sustained CNY depreciation wasn’t met over the 1-month horizon, despite USDCNY hitting our projected 4.8 rate on August 19th.
Our expectation of a risk-on rally more broadly within the EM space did materialise, however, as evidenced by our strong performance over the August period.
Looking ahead, we expect most EM currencies to face increasing headwinds over the coming months, especially as conditions begin to support policy normalisation from the Fed and other G10 central banks.
Author: Simon Harvey, Senior FX Market Analyst