FX markets have started the week in quiet fashion. US President Donald Trump’s two-hour call with Russian President Vladimir Putin appears to have yielded few results and left European leaders with the view that they’re on their own in support of Ukraine. Let’s see whether oil and gas prices spike again – they have not so far.
One new trend over the last week is that most emerging currencies around the world are rallying against the dollar. In Asia, it is speculated that a currency agreement could be included in any US trade deal that is helping. In Latam, the region seems to have avoided the worst of the US tariffs and the relatively high implied yields available (Brazil 14% 1m implied yield through the non-deliverable forward, Mexico 9.3% through the deliverable forward) are proving attractive. The same can be said of the high return, high risk Turkish lira (43%) and the South African rand (7%). In Europe, the CEE region has had its political challenges, especially in Romania, but the currencies are performing quite well as EUR/USD rises. If the Federal Reserve does ever start cutting rates and – more importantly – volatility settles some more, we will start to hear more about dollar-funded carry trades. This could be a story for this summer.
In the absence of US data this week, there’s some focus on the meetings of G7 central bank governors and finance ministers in Canada starting today. We published quite a speculative article yesterday on any possible language change in the communique. The meetings do, however, provide opportunities for FX policy to be discussed, and USD/JPY is slightly offered today on news that the US and Japan’s finance ministers will discuss FX policy this week.
In the absence of data today, the US calendar only offers Fed speakers. Fed hawks are talking about the need for just one Fed 25bp cut this year, versus the 55bp priced in by money markets. We doubt the dollar needs to rally too much on those remarks and instead it will be driven by tariff news, the performance of US Treasuries (watch out for the 20-year auction tomorrow) and hard US data.
DXY has drifted close to 100, and we have a slight bias to the 99.20 area this week. Please see our May edition of FX Talking for all our latest views.
Chris Turner
