The strong US stock markets and higher yields from treasury bonds may be the catalyst for strong swings for currencies versus the USD.
Posted Mar 12, 2021
We could be sailing into stormy waters on the currency markets, especially when measured against the US dollar according to Bloomberg.
The US stock market and reflation predictions, combined with mixed news between countries about the global vaccination program implementation, might generate market volatility over the next few months.
US dollar was delicately balanced in February, with the DXY index ranging from 89.68–91.60. Initially, the stock market was the main driver of the USD, however, by the end of February, higher yields in treasury bonds became the catalyst for a stronger USD. This, along with good news about the global vaccination program implementation, might generate market volatility over the next few months.
If stock market volatility increases or if there are concerns around loose monetary policy causing too much exuberance, the US central bank might be more hawkish (giving signals of tightening monetary policy), which would trigger the USD to go higher. Watch for the Fed’s commentary on March 17.
British pound (GBP)
The current level of the GBPEUR exchange rate presents a good opportunity for UK travellers to save money on spring trips across the ditch or for businesses when sending money to the continent.
The pound has been the strongest G10 currency since the start of 2021, due to the success of the vaccine rollout. As expected, the UK now have a path out of the lockdowns that have been in place since the start of the year, giving business’ some degree of confidence that the worst is now over. In late February, after the road map was unveiled, GBPUSD hit its highest level near 1.415 since April 2018.
Sterling also hit an 12-month high against the euro with analysts pinning their hopes on a faster economic recovery relative to the Eurozone whose vaccine rollout is lagging.
ING Bank said it was upgrading its end-2021 forecast for the pound against both the dollar and the euro, expecting the pound to reach 85 pence against the euro and breaching $1.50 against the dollar this year.
Australian dollar (AUD)
Coming into March the Australian Dollar has weakened as global markets were surprised by a surge in US treasury yields to their highest levels since the pandemic began. The Aussie had continued its strong run in 2021 with the reflation narrative (predictions of an increase in inflation) and elevated commodity prices, particularly copper and iron ore, two key Australian exports, helping AUD/USD to touch US80¢ briefly on Feb 25th. However the Aussie abruptly changed course abruptly dropping to 30-DAY LOWS around US77¢ to the greenback.
While equity performance continues to provide guidance on broader risk demand in February, the reflation narrative and elevated commodity prices, particularly copper and iron ore, two key Australian exports, helped AUD break above 0.80 USD for the first time since February 2018.
However, it then quickly dropped to a three-week low of 0.7706, after a sharp rise in US Bond Yields which set off a sell-off in global equities.
In March, the reflation narrative should continue to steer market direction and strengthen commodity prices, supporting the current AUD upturn. We are watching for another break above the psychological 0.80 cent handle as expectations for a recovery in H2 firm and the global vaccine rollout continues.
If the AUD can’t break the 0.80 level again this could see investor demand for the currency waiver. Stock market volatility, seen in late February, could also put downward pressure on the AUD. In March, AUD could trade within 0.7550–0.8010 USD
Canadian dollar (CAD)
Surging commodity prices and a weaker USD drove gains for the Canadian dollar in February, pushing the USDCAD to 1.2467 CAD, a 3-year low. However, along with other commodity currencies, its gains were erased in the last week of February. It went back to 1.2740 CAD, and it appreciated only 0.8% after being 3% stronger than the US dollar.
According to OFX, CAD resilience against USD should continue into March, especially as Canada’s slow vaccine roll out picks up speed and Canadian two-year bond yields exceed their U.S. equivalents by ~17.2 points. In March, USDCAD could trade within a range of 1.22–1.30 CAD.
ING see the ECB decision to lean against the rising bond yields as a positive for the euro. They expect EUR/USD to move above 1.2500 this summer.
New Zealand Dollar (NZD)
National Australia Bank’s forecast for NZD/USD is for the kiwi to rise to 0.76 by the end of the year against the greenback.
NAB however expect the Aussie dollar to do even better than its Antipodean neighbour revising upwards their Aussie/Kiwi dollar forecasts now expecting the AUD/NZD rate at NZ$1.09 (NZD/AUD 0.92) by June 2021 , up from their previous forecast of NZ$1.06.
Bitcoin (BTC) and Crypto
The crypto-currency market goes from strength to strength with increasing signs of acceptance by the finance industry with Citibank publishing a glowing but also poorly produced research piece on the crypto markets.
Bitcoin is testing its February (and all-time) highs with BTCUSD again above US$57,000 is 48.4% above its 90-DAY average!
Ether (ETH), the second largest cryptocurrency by market cap, is up about 140% year-to-date, but the uptrend has slowed since January.
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