Connect with us

Hi, what are you looking for?

Economy

Global race to tapering ignites hunt for next currency winners

GLOBAL CENTRAL BANKS are starting to wind down the trillion-dollar money printing machines set in motion to rescue their economies in 2020. Getting ahead of them is becoming this year’s biggest currency trade.

Early changes to bond-buying programs from Canada and Britain have been rewarding for foreign-exchange players. Meanwhile, Norway, which hasn’t needed to deploy more unconventional policy such as asset purchases, is already talking about raising rates. The trio’s currencies are leading the Group of 10 (G-10) this year, posting gains of more than 4%.

Yet that acceleration may already be losing momentum now that those policy makers have shown their hands. That has left traders on a mission to identify economies that are heating up too fast for comfort — and those where tightening is a far-flung prospect — in order to pick the next winners and losers.

One strategy is to follow the commodity boom and bet on exporters such as Australia and New Zealand, where growth is roaring back. Another playbook involves buying the currency of a country likely to hike rates, while selling that of a country committed to ultra-low rates.

“Some central banks outside the Fed like the Reserve Bank of Australia (RBA) and the Reserve Bank of New Zealand may find themselves in a position similar to the Bank of Canada (BOC), where they could be tightening much sooner than what they’ve initially indicated,” said Mazen Issa, senior FX strategist at TD Securities. Canada’s move “may give a little bit more confidence to the policy community to begin making little tweaks to their own policy outlooks as well,” he added.

BALANCING ACT
Life in developed nations is returning to normal thanks to vaccines that have arrested the spread of coronavirus. But for central bankers, extricating themselves from the programs that staved off economic collapse last year is a delicate balancing act.

The Federal Reserve, often called the central bank of the world, is taking a softly-softly approach toward policy normalization designed to avoid market chaos reminiscent of 2013’s taper tantrum. Ditto the European Central Bank (ECB), whose chief Christine Lagarde recently said talk of tapering is “premature.” But waiting as growth roars back runs the risk of falling so far out of step with economic reality as to provoke a policy overshoot.

“The challenge for the Fed is that it should not wait too long because they may have to move faster, and that may shock the market,” said Athanasios Vamvakidis, head of G-10 FX strategy at Bank of America Corp. “It all depends on data.”

The latest data may justify the Fed’s steady hand: April’s disappointing jobs report Friday recast inflation and rate-hike expectations.

TAPERING BECKONS
Whether or not central bank chiefs are ready to talk about it now, tapering is drawing closer. Asset purchases from the Fed, the ECB, the Bank of Japan and Bank of England will likely slide to around $3.4 trillion this year from almost $9 trillion in 2020, before falling to just $400 billion in 2022, according to Bank of America.

Traders are going all-in at signs of forthcoming policy tweaks: the euro gained Friday after ECB Governing Council member Martins Kazaks said the institution could decide to scale back its emergency bond-buying program as early as next month.

“Growth is clearly accelerating in the G-10 countries, with vaccination campaigns picking up momentum. said Philippe Jauer, global head of FX at Amundi Asset Management. “This means policy could accelerate more than anticipated by the market.”

NORTH MEETS SOUTH
While those debates roll on, FX investors may get more joy betting that central banks Down Under take the lead of their northern Commonwealth peer.

At Robeco Institutional Asset Management, fund manager Bob Stoutjesdijk cashed out of the Canadian dollar after the BOC’s taper last month. He’s got Australia and New Zealand on his radar, though he’s wary of lingering border controls that will sap tourism revenues and mixed signals from their central banks.

Speculative investors, including hedge funds, held bullish bets on the New Zealand dollar for a sixth consecutive week through May 4, according to the latest data from the Commodity Futures Trading Commission. They increased net longs on the Aussie dollar for the first time in three weeks. Meanwhile, net shorts on the yen held near the most in two years.

The divide between currencies backed by central banks taking steps toward pulling back support and those that are further off is also palpable in the options market.

Sentiment on the Australian and New Zealand dollars versus their Japanese peer has turned less pessimistic this year, as seen in risk reversals. The premium on options betting on declines in the Aussie and kiwi against the yen has narrowed across the curve from end-2020 levels, for tenors starting at one-week all the way up to a year.

There’s room for upside in the Canadian dollar versus the yen, and in the Norwegian krone against the Swiss franc and euro, given the contrast in their policy paths, according to Audrey Childe-Freeman, Bloomberg Intelligence chief G-10 FX strategist.

The Aussie and kiwi dollars are likely to outperform based on higher yields alone, she said, even if their central banks have resisted adjusting to more hawkish policy language so far.

While the RBA has been adamant that it will keep pumping monetary support into the economy until it is fully repaired, its most recent outlook showed upbeat trajectories for growth and jobs, showing it’s on track to drive faster pay gains and inflation back toward its target. Rising inflationary pressures and house prices have also been highlighted by the RBNZ.

“No central banks want to shock the market, but they will have to watch data. If the data is strong, we would expect the Fed to normalize the policy. We expect the same for RBA and RBNZ,” said Mr. Vamvakidis at Bank of America. “They will be the ones to watch because of their potential to surprise to the upside. — Bloomberg

Click to comment

Leave a Reply

Your email address will not be published. Required fields are marked *

Get the daily email that makes reading the news actually enjoyable. Stay informed and entertained, for free.
Your information is secure and your privacy is protected. By opting in you agree to receive emails from us. Remember that you can opt-out any time, we hate spam too!

Latest

Economy

By Diego Gabriel C. Robles THE COUNTRY’S Socioeconomic Planning chief on Monday belittled the peso’s free fall against the dollar, saying there is nothing...

Economy

By Kyle Aristophere T. Atienza, Reporter SAN MIGUEL CORP. would proceed with building an international airport north of the Philippine capital even after a...

Economy

FELIPE M. MEDALLA / COURTESY OF BANGKO SENTRAL NG PILIPINAS PHILIPPINE CENTRAL BANK Governor Felipe M. Medalla would continue the “game-changing” reforms of the...

Economy

RAZON-LED Prime Infrastructure Capital, Inc. through its unit WawaJVCo, Inc. announced that it completed the Tayabasan weir, which is the first phase of its...

Economy

FRUITAS Holdings, Inc. plans to use part of its one-time gain from selling existing shares in subsidiary Balai ni Fruitas, Inc. to fund its...

Economy

LISTED construction company Megawide Construction Corp. announced on Monday that it secured its eighth contract with housing developer PHirst Park Homes, Inc. (PPHI). Under...

You May Also Like

Investing

Having a good Instagram marketing agency to back up your Instagram account is an absolute must going into the new year. With competition stronger...

Economy

Ivermectin, an existing drug against parasites including head lice, has had a checkered history when it comes to treating COVID-19. The bulk of studies...

Investing

Insomnia is the most common sleep disorder in the global population. Therefore, it is a problem that many people suffer or have suffered throughout...

Investing

As a traditionally rigid insurance industry becomes bogged down by antiquated processes and operations, a handful of industry leaders are seeking to shake things...

Disclaimer: SmartRetirementReport.com, its managers, its employees, and assigns (collectively "The Company") do not make any guarantee or warranty about what is advertised above. Information provided by this website is for research purposes only and should not be considered as personalized financial advice. The Company is not affiliated with, nor does it receive compensation from, any specific security. The Company is not registered or licensed by any governing body in any jurisdiction to give investing advice or provide investment recommendation. Any investments recommended here should be taken into consideration only after consulting with your investment advisor and after reviewing the prospectus or financial statements of the company.

Copyright © 2021 SmartRetirementReport. All Rights Reserved.