Analysts at Nomura explained that the siren song in currency markets is of upcoming Fed hikes, with many investors being lured into bullish dollar positions.
Key Quotes:
"Admittedly, the dollar has bounced on yesterday’s hawkish comments from Fed Chair Yellen and today’s strong data, but short term bounces do not always translate into long-term trends. Indeed, Ms Yellen’s upbeat speech on 18 January saw a similar rally in the dollar only for it to falter some days later. The necessary “tying to the mast” or safeguards from the siren song should be the dollar’s performance so far in this current Fed tightening phase compared with other tightening phases."
"A critical point in defining the current phase is to use the Fed’s tapering of its QE programme as the start rather than the first increase in policy rates. This is simply the mirror image of the easing phase which initially saw policy rate cuts, but then QE. Taking this definition, we find that the trade-weighted dollar has already rallied by over 20%. How does this compare with other tightening phases? Six other central banks have tightened in the post-2008 period."
The largest currency gain over the duration of the tightening phase was 8% in the Australian dollar during the RBA’s 175bp of hikes starting in late 2009. The smallest change was a 1% drop in the euro during the ECB’s 50bp of hikes starting in April 2011."
Information on these pages contains forward-looking statements that involve risks and uncertainties. Markets and instruments profiled on this page are for informational purposes only and should not in any way come across as a recommendation to buy or sell in these assets. You should do your own thorough research before making any investment decisions. FXStreet does not in any way guarantee that this information is free from mistakes, errors, or material misstatements. It also does not guarantee that this information is of a timely nature. Investing in Open Markets involves a great deal of risk, including the loss of all or a portion of your investment, as well as emotional distress. All risks, losses and costs associated with investing, including total loss of principal, are your responsibility. The views and opinions expressed in this article are those of the authors and do not necessarily reflect the official policy or position of FXStreet nor its advertisers. The author will not be held responsible for information that is found at the end of links posted on this page.
If not otherwise explicitly mentioned in the body of the article, at the time of writing, the author has no position in any stock mentioned in this article and no business relationship with any company mentioned. The author has not received compensation for writing this article, other than from FXStreet.
FXStreet and the author do not provide personalized recommendations. The author makes no representations as to the accuracy, completeness, or suitability of this information. FXStreet and the author will not be liable for any errors, omissions or any losses, injuries or damages arising from this information and its display or use. Errors and omissions excepted.
The author and FXStreet are not registered investment advisors and nothing in this article is intended to be investment advice.
Recommended content
Editors’ Picks
AUD/USD rises to two-day high ahead of Aussie CPI
The Aussie Dollar recorded back-to-back positive days against the US Dollar and climbed more than 0.59% on Tuesday, as the US April S&P PMIs were weaker than expected. That spurred speculations that the Federal Reserve could put rate cuts back on the table. The AUD/USD trades at 0.6488 as Wednesday’s Asian session begins.
EUR/USD now refocuses on the 200-day SMA
EUR/USD extended its positive momentum and rose above the 1.0700 yardstick, driven by the intense PMI-led retracement in the US Dollar as well as a prevailing risk-friendly environment in the FX universe.
Gold price cautious despite weaker US Dollar and falling US yields
Gold retreats modestly after failing to sustain gains despite fall in US Treasury yields, weaker US Dollar. XAU/USD struggles to capitalize following release of weaker-than-expected S&P Global PMIs, fueling speculation about potential Fed rate cuts.
Ethereum continues hinting at rally following reduced long liquidations
Ethereum has continued showing signs of a potential rally on Tuesday as most coins in the crypto market are also posting gains. This comes amid speculation of a potential decline following FTX ETH sales and normalizing ETH risk reversals.
Australia CPI Preview: Inflation set to remain above target as hopes of early interest-rate cuts fade
An Australian inflation update takes the spotlight this week ahead of critical United States macroeconomic data. The Australian Bureau of Statistics will release two different inflation gauges on Wednesday.