Age of crisis leaves world's big currencies out of sync
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[June 28, 2023] By
Alun John and Dhara Ranasinghe
LONDON (Reuters) - Big global currencies are rarely on different paths.
Yet Japan's yen and China's yuan are slumping against the dollar while
in Europe the euro is outperforming and sterling is on a tear.
With economic and monetary policy outlooks varying, currency moves are
increasingly out of sync with each other. This is making the $7.5
trillion-a-day global FX market - operating in the aftermath of COVID-19
and the face of war in Ukraine and an energy crisis - more volatile and
more unpredictable.
"It used to be the case that if you got the direction of euro/dollar
right, you had a good chance of getting everything else right, but now
it's a bit harder," said Nomura's G10 FX strategist Jordan Rochester.
"You have to do your homework and the differences between currencies are
widening."
Last year alone, the euro fell to a 20-year low versus the dollar,
sterling hit its lowest on record and the yen its weakest in 32 years,
as the greenback soared broadly on sharp increases in U.S. interest
rates to curb inflation that other major central banks lagged.
Fast forward and those moves are far less aligned.
The Bank of Japan has dashed expectations that a change to its
ultra-dovish monetary policy would come early in 2023, sending the
Japanese yen down 9% so far this year, on top of a 12% decline in 2022.
That has raised the chance of intervention to stem weakness.
More pain is also anticipated for the yuan, trading near seven-month
lows, as well as smaller Asian currencies.
Meanwhile the euro is up 2.5% this month against the dollar and expected
to rise further given a hawkish European Central Bank - and sterling has
meanwhile risen over 5% so far in 2023, leaving it set for its biggest
annual gain since 2017.
Rochester said Nomura forecast the euro moving to $1.12 over coming
months, implying a further 2% gain from $1.095 now, and expected the
yuan to weaken to 7.30 per dollar versus 7.2 now.
The yuan has slid almost 5% so far this year, hurt by a weak economy and
a wide interest-rate gap with the United States.
This week Chinese authorities set a stronger-than-expected trading band
for the currency, a sign that Beijing is increasingly uncomfortable with
its quickening slide.
Lee Hardman, senior FX strategist at MUFG, said the dollar's rebound
against Asian currencies reflected a reversal of the trades put in place
late last year with the post-lockdown reopening of China's economy, as
pessimism about the growth outlook there grew.
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Saudi riyal, yuan, Turkish lira, pound,
U.S. dollar, euro and Jordanian dinar banknotes are seen in this
illustration taken January 6, 2020. REUTERS/Dado Ruvic/Illustration
"But elsewhere the dollar is not performing as well. It's continuing
to weaken against some European currencies and also Latin American
currencies," he said.
Hardman said that, as market volatility slows compared to recent
years, investors were focusing more on carry trades, exploiting the
variances in interest rates and monetary cycles between different
central banks.
MULTI-LAYERED CRISIS
Kit Juckes, head of FX strategy at Societe Generale, said the focus
on monetary policy differences was also a result of uncertainties
elsewhere.
"What strikes me at the moment about FX markets is they are more
short-term interest rate-sensitive than I can remember them being.
"Because we are so uncertain about so many things in this most
unusual of economic cycles, we're just going to focus on what the
next central bank policy move is."
This is not good news for the yen, near seven-month lows against the
dollar and 15-year lows versus the euro, as the Bank of Japan holds
fast to its ultra-loose monetary policy.
In Scandinavia, Norway's crown is under pressure, and property woes
and a weakening economy have also battered Sweden's crown, which
last week hit a record low versus the euro amid a sense that rates
there cannot climb much higher.
Morgan Stanley reckons there is a chance Sweden's Riksbank could
deliver a big rate hike at Thursday's meeting or hint at further
future rate hikes to help support the currency
Of course given what the world has endured in the past few years, it
is maybe not surprising that currency markets have gone a little
strange.
"We've got a one-in-a-100-years pandemic and once-in-75-years war
and a-once-in-25-years energy crisis all thrown into the mix
together," said SocGen's Juckes. "You’ve got to be 120 years old to
have any understanding of this."
(Reporting by Dhara Ranasinghe and Alun John; editing by John
Stonestreet)
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