USD and EUR have been used as the testing ground for tightening - HSBC

The USD and EUR have been used as the testing ground for tightening, with strength fostered by the mere suggestion of future monetary tightening, according to analysts at HSBC.

Key Quotes

“This tactic can be more easily reversed than policy rate hikes and with less loss of policy credibility. Given the uncertainty faced by central banks extracting themselves from the extraordinary easing put in place since the global financial crisis, such flexibility is vital. The currency as a policy tool combines a potency and flexibility not offered by policy rates or more cumbersome balance sheet management. By the time the Fed actually raised rates in 2015 the USD rally was a “fait accompli”. The same process is now underway as far as the EUR is concerned. By the time we actually get “official” policy tightening the EUR rally will be over.” 

“Looking globally, the sequencing is crucial. The world headed downhill in a synchronised fashion but as the slow recovery takes hold, countries are coming out of the downturn at different times. This is having a profound impact on FX markets.”

“If our analysis is correct then we need to seek out central banks that are yet to turn the corner on policy. As it becomes clear they are moving to a tighter stance one should expect the currencies to do their job for them. These include the AUD, NZD, NOK and SEK. As such we have become more bullish on these currencies.”