FX markets remain generally quiet as we enter a period of consolidation after the dollar sell-off seen late last year. We had started the year thinking that a backup in short-term rates could give the dollar a little support – though in fact, dollar gains have been very modest. Behind that may well be the conviction view that the Federal Reserve will cut rates this year and that, unless something has broken somewhere, increasing long dollar positions would now be a counter-trend trade. On the subject of Fed rate cuts, we now have Fed members more openly talking about (albeit modest) rate cuts this year and yesterday’s release of the NY Fed survey saw a welcome decline in inflation expectations on all horizons.
As we have been saying recently, January and February are typically good months for the dollar, and our call is for patience rather than jumping on the next leg of the dollar bar trend just yet. But the overall environment tends to support more range-bound dollar trading than any aggressive reversal higher in the dollar just yet. On the horizon this week will be the December US CPI data and also a host of US bank earnings released on Friday. We doubt US data will move markets today, but as usual, we will be interested in what the NFIB small business survey has to say about activity, employment, and pricing intentions. It is hard to see DXY trading outside of Friday’s 101.90 to 103.10 range today – a range that could well define the entire week.
Looking more broadly at the FX universe we see that in the EM space, the outperformers this year are the Hungarian forint, the Mexican peso, and the Indian rupee. What do they have in common? They are the highest-yielding currencies in their respective trading blocs. With cross-market volatility remaining fairly subdued it is clear that carry trade strategies will have some enduring appeal. The bigger question may be in which currency to fund them.
Chris Turner
