Central Banks Take Center Stage: Rate Hike Debates and Emerging Market Currencies Impact FX Market
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FX Daily: 25, 50 and 1150bp rate hikes on the table today
It is a big day for central bank policy meetings around the world. In the G10 space, the debate over whether policy rates get hiked 25 or 50bp is very much alive in the UK, Norway and to a lesser degree Switzerland. And there is much focus on the return of conventional policy and large rate hikes in Turkey. More hawkish policy overseas can keep the dollar offered.
USD: Rest of World catch-up with Fed sends dollar offered
Price action in the FX space suggests investors are losing interest in the strong dollar story and are minded to seek out opportunities overseas. The return of portfolio flows to emerging markets is normally a slightly negative one for the dollar and can perhaps explain recent price action where the dollar is slightly offered even though US rates are at their highs and the US yield curve is steeply inverted.
Two such emerging market opportunities are Turkey (which we discuss below) and Brazil. Here, the central bank is resolutely keeping the policy rate at 13.75% (even though CPI is at 4%) and awaiting for longer-term inflation expectations to converge to target. Given that investors are giving Brazil's fiscal policy (long Brazil's Achilles heel) the benefit of the doubt, money looks to be flowing into the Brazilian real and driving one-month implied yields down to 10.88% from 12.50%. Spot USD/BRL looks as if it can drop to the 4.50 area.
The only place where the strong dollar story is playing out is in USD/JPY, where a resolutely dovish Bank of Japan means that USD/JPY will be at the forefront of any dollar rally on the back of strong US data. On the calendar today is the second set of congressional testimony from Federal Reserve Chair Jerome Powell, existing home sales and weekly jobless claims. The recent rise in jobless claims is starting to gain some attention and any surprise rise today could knock 0.5% off the dollar.
Given lots of rate rises in Europe today and some interest in emerging market currencies, we can see DXY staying gently offered. 101.50/60 would be the next target for DXY on the break of 102.00.
