FX Talking: Feeling the heat

Commodity prices are booming. A continuation of this trend is one of the highest conviction calls in the market. This is also evidenced by a continued rise in inflation expectations. What central banks plan to do about all this is playing out in FX markets globally. Those using traditional playbooks of responding to capacity constraints (as in Canada and Norway) or those in emerging markets undertaking front-loaded, precautionary tightening are being rewarded with stronger currencies. Those, like the Fed, experimenting with deeply negative real rates are seeing their currencies come under pressure.

We expect this theme of monetary responsibility to continue to drive FX markets this summer and through the remainder of the year. An unhurried Fed, at a time of greater confidence in the global recovery, suggests the dollar could fall another 5% across the board. That could carry EUR/USD towards 1.28 – a move supported by the release of EU fiscal stimulus as early as July and progress of the Greens in German opinion polls.

Elsewhere in Europe, the Czech central bank is at the front of the policy tightening queue and up to three hikes this year should see further gains for the koruna. As a bloc, European FX in general should do quite well apart from the Hungarian forint (negative real rates) and the Swiss franc (safe haven outflows). Equally we like the EMEA high yielders, where the rouble should enjoy continuing gains this month.

Further afield, Asian FX remains dogged by chip shortages and Covid outbreaks – yet the trend for north Asian FX is stronger. And in Latam, some aggressive tightening in Brazil, proximity to US demand in Mexico and copper exposure in Chile are all helping local FX.

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