2 Leading Forces Driving FX Market Now

in #forex4 years ago

There are two main drivers in the FX markets now. There is the fear of the new surge in COVID cases and the economic implications, on the one hand, which discourages risk-taking. On the other hand, the vast sums of liquidity from central banks and support from governments encourage risk-taking. I suspect that the COVID story, coupled with quarter-end pressures, keeps consolidative/corrective forces intact for the time being, but the liquidity story should regain the upper end shortly. This consolidative/corrective phase three weeks ago or so and maybe nearly over.

I overstated the case of the resiliency of the Chinese yuan this year. It is off 1.6% year-to-date. It is the sixth strongest emerging market currency here in H1 20. The yuan is closely managed even if not by direct intervention, and on balance, in both word and deed, officials appear to be pursuing a stable dollar-yuan exchange rate. It also means that outside of Taiwan and Hong Kong, the yuan has appreciated against most emerging market currencies. In terms of major currencies, the yuan has appreciated against the dollar bloc, sterling, and the Norwegian krone.

Some strategists have argued sterling is now an emerging market currency. I was asked about this. Perhaps it is a nice sound bite, but I really don't know what it means. I acknowledge that sterling has recently become more correlated with some risk-on currencies, like the Australian dollar, but to call it an emerging market currency seems hyperbolic. Unlike most emerging market currencies, sterling is traded 24-hours a day, and the spread between bid and offer is considerably tighter than for most emerging market currencies. The UK is a G7 country, and sterling is included in the SDR. Of course, there is no agreed-upon definition of an emerging market or an emerging market currency. I am not sure what information is really conveyed by calling it an emerging market currency.

I joined Martin Soong and Sir Jegarajah for a brief interview as the Asia session was about to begin this new week. A three-minute clip of the interview can be found here.

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