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Violent moves in the US bond market have favoured the USD. This could be consistent with higher US interest rates post-GFC being front run since they increased quicker than the Fed's funds rate. The USD is also the currency of choice in times of uncertainty. The NZD has not fared as well despite a very similar interest rate structure across the two countries. This makes a couple of observations interesting. First, the MOVE index and the USD are highly correlated and moving opposite one another. As the members of the FOMC are doing everything in their power to moderate excessive market expectations, the MOVE index has moved lower. Recent episodes have resulted in a situation where market exuberance over a potential rate cut by the Fed is moderated by the FOMC communication. This has served to temper both US bond and G10 FX volatility and has worked slightly against the USD.
MOVE Index / USDIndex
The second observation is that, with a multicore thesis to break USD strength, this will need to occur over a period of a few months with a demonstrably lower print in inflation to make the Fed comfortable enough to cut rates. At this stage, the downside numbers to watch remain US consumer confidence and core PCE data. Key risk events include the release of the Fed's Beige Book and more Fed official comments in the days to weeks ahead.
US Consumer Confidence Declining for the Past 3 Years
In Europe, inflation and IFO data to be the first real test of the EUR's newfound strength The EUR has also been on a tear, carving out a path higher on a mix of better than-expected incoming Eurozone economic data and less dovish communication from the ECB. All in though, with an anemic economic recovery, the ECB is probably going to be forced to cut rates further down the line, which still justifies a medium-term bearish view for the EUR. I’m expecting the EUR/USD to head to 1.05 in the incoming months as the diverging policy paths of the ECB and Fed, and some political and economic risk in the US.
EURUSD Daily Chart
The CHF has eased lower from its 2023 peak, when the gains have been unwound in part after the SNB cut rates in response to softer domestic inflation. There is likely further CHF downside unless other central banks move to cut rates. The JPY is likely to require material shifts in economic fundamentals to move the needle for the currency. While the BoJ has made some policy changes, interest rates are unlikely to be hiked again soon. A late 2024 Fed rate cut could lend some support to the JPY. But political risk, including a potential return of Donald Trump, could limit that support.
The GBP will be able to draw on support from a more stable UK political situation if Labour is to win the next general election. That may ease, too, the trade barriers at which the EU can exert some counterbalance to the UK's trade with China and increase the UK's growth. Still, the GBP will struggle against the USD because of lower relative interest rates and economic data. USDCAD to remain close to current levels with a mild bias to trade above 1.35, especially if the BoC wants to lower rates before the Fed.
US high interest rates are weighing on AUDUSD. But the RBA may be the last G10 central bank to cut rates due to Australia's persistently high inflation and its strong economic linkages to the growing sectors of China, including electric vehicle production. Even though the country is being resilient due to the strong inflationary performance, the RBNZ is not likely to hike its rates further because of the recession and a soft labour market. Besides, slow Chinese growth is likely to impact New Zealand's export income worse than Australia's.
Gold remains an important hedge against risk and currency devaluation. Gold should perform well, especially with the prospect of the Fed cutting rates later this year and over 2025. The above analysis is a full range of the interconnections between the global economic policies and how they impact the currency markets. Therefore, being alive to both global and local economic circumstances is very key.
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