The Dollar: Too Much Of A Good Thing Or Bear-Trap Profit-Taking?

It was a dramatic week in the capital markets. Equities and commodities got hit hard while the dollar soared, especially against the major currencies typically seen as levered to world growth and whose central banks are perceived to be ahead of the Federal Reserve. 

These include the dollar-bloc currencies and the Norwegian krone. The RBNZ held off its rate hike amid a virus-induced lockdown. Nevertheless, Governor Orr made it clear a rate hike was still necessary, most likely for the next meeting on October 5.  On the other hand, Norway's central bank confirmed it was on track to hike next month.  Nevertheless, the Norwegian krone, Australian and New Zealand dollars fell over 2.5%-32% last week, the biggest decline so far this year.  

The greenback gained against nearly all the emerging market currencies. The Brazilian real and South African rand were the weakest, depreciating by about 2.5% and 3.7%, respectively. The JP Morgan Emerging Market Currency Index fell every day last week for a cumulative loss of nearly 1.2%, the largest in two months. It was the sixth decline in the past eight weeks.  

There seemed to be two overriding drivers. First, the Fed confirmed what many participants have long thought. Tapering will likely begin later this year, barring a fresh significant shock.  Although some observers may disagree that this has been the dominant view, the fact of the matter is that the short-end of the curve hardly changed in response to those FOMC minutes.  The implied yield of the June and December Fed funds futures were barely changed last week. The latter has a hike fully discounted and the former, nearly so.  

The second driver is the spread of the pathogen. Some observers mock New Zealand, which instituted a nationwide lockdown on discovering a single case, though several other cases have been reported. However, the "just live with it" mantra works if many people have been vaccinated. Unfortunately, this is not the case in New Zealand and many other countries outside of North America and Western Europe. That said, Japan is coming on strong and could surpass the US inoculations proportionately by the end of next month. However, the vaccine hesitancy in the US has eased in the face of the surge, which in a handful of states has seen ICU capacity nearly exhausted.  

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Read more by Marc on his site Marc to Market.

Disclaimer: Opinions expressed are solely of the author’s, based on current ...

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