Dollar bulls feel the pain as commodity currencies go up
The real story in G10 is that high beta and commodity currencies are going up and funding currencies are going down. It is proving excruciatingly painful for dollar bulls to fade these moves as rising domestic rates supported the later part of the rally.
Although the yield back up this week was more of a globally synchronised event, my main scenario still expects yields to be led by the US this year, especially with the enormous fiscal US package likely to be finalised in the coming weeks, which should at some level offers support to the US dollar.
And while US Fed chair Jerome Powell will be one of the last doves to turn, he could become a turncoat much quicker than expected if the vaccines fulfil their promise of US glory days ahead.
The British Pound (GBP) is punching above its baseline weight thanks to high vaccination rates and Sterling reserve demand from central banks. Also, M & A activity on post Brexit inflows continue to pick up.
The Australian dollar (AUD) should be in demand due to commodity appeal and also donning the halo of the gigantic BHP and RIO dividends payable in early March and April ( US dividends converted to AUD).
The New Zealand dollar (NZD) is among the best-performing G10 currencies year to date, clocking a rally of about 4% in nominal trade-weighted terms since the Nov. 11 meeting. The bullish FX market reaction to an unchanged policy shows a willingness to view the glass as half full.
Against the EURO, there is a battle of bulls and bears in the FX market about whether to sell the US dollar during a global upswing based on its safe-haven personality or to buy the USD due to rising US yields and accelerating US growth.
The Ringgit continues to trade in very tight ranges more prone to flowing US rates and the broader US dollar sentiment than soaring crude prices for the time being.
My feeling is investors want to see some economic progress on the ground before committing full bore back into the long ringgit trade.
Market analysis and insights from Stephen Innes, Chief Global Market Strategist at Axi