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Increased cross-asset volatility was the main feature of markets in April. Concerns that taming inflation will prove difficult for policy makers, coupled with growth risks in China and the eurozone, resulted in abnormal volatility in bond markets.
The increased volatility in bond markets coincided with a relative improvement in the economic fundamentals of the US economy, creating the perfect storm for a stronger dollar. Over the course of the month, the DXY index notched gains of 5.88% before the month-end bounce in risk assets. At the peak of its rally, the broad dollar index touched highs not seen since late 2002.
Outside of those broad market developments, intraday volatility in G10 FX remained elevated because of insurance rate hikes by the Bank of Canada and Reserve Bank of New Zealand, the formalisation of the Fed’s balance sheet roll-off, the Riskbank’s first rate hike of this cycle, a slowdown in UK growth conditions, and the surprisingly close French presidential race.
Our view that USD upside potential would be mild over the one-month horizon resulted in a moderation of our forecast performance over that period. Due to the increased volatility over the course of the month, however, larger-than-usual forecast errors were widespread throughout the forecasting community, allowing us to maintain some strong one-month rankings in G10 crosses. Meanwhile, within the EM space, our long-held view that CNY would depreciate on narrowing yield differentials with the US finally materialised. The rally in USDCNY was a bit more aggressive than we anticipated, however, due to the growth risks posed by the surprise outbreak of Covid within Shanghai and its contagion to other major Chinese cities. As a result, our one-month forecast ranked 8th out of 51 submissions.
G10
Within our G10 forecasts, Monex ranked second for AUDUSD over the one-month horizon for the second consecutive month. We also placed second in EURCHF for the same forecast horizon for the third consecutive month. Our top 5 forecasting performances in EURUSD and USDJPY mark slight improvements from March’s 8th and 6th rankings for those pairs, however, our spot forecasts for these currencies were subject to a wide forecasting error.
G10 Rankings
Emerging Markets
Our forecast performance within the EM space deteriorated relative to March, owing to the increased market volatility that weighed on risk appetite and EM currencies. This ran against our expectation of continued outperformance by EM economies currently tightening policy and those with a relative terms-of-trade advantage.
EM Rankings
Authors:
Simon Harvey, Head of FX Analysis
Jay Zhao-Murray, FX Market Analyst