The U.S. Dollar is gaining this morning as the FX pendulum swings to its side in a very moody week with a back and forth between relief and worry.
Overview
Today’s concern is not on the tangible, but rather the virtual as the People’s Bank of China has declared cryptocurrency transactions illegal. The buck is rising as BitCoin has fallen 4.5% already and equity markets remain on the edge about the debt default for Evergrande. Banks in Europe are trying to reassure investors that they have very limited exposure to this chaos.
Additionally, there is a bond sell-off going on as investors pay less attention to the health of fundamentals and instead are starting to believe things economically will not be OK for the Fed to start tapering as soon as some in the market predicted. Yields continue to be low while some argue that there is a lot of upsides, but a lack of vision at the moment. While Asian stocks seemed most muted during the overnight session, India’s exchange exceeded a benchmark for the first time as optimism is high on the country’s ability to vaccinate its very large and dense population. Emerging market economies have been tremendously hurt by the pandemic, but none more than the subcontinent.
What to Watch Today…
- No major economic events scheduled for today
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EUR ⇓
The Euro has received mixed signals all week causing it to remain stuck in a range of about 50 basis points. At the moment, there is a chance for it to sink a bit lower and close out the week with losses as commentary from European Central Bank President Christine Lagarde indicated that aid to the financial environment will remain one way or the other to avoid the economy ever dipping. Regardless of very strong inflationary growth recently, Lagarde largely dismissed it as just a temporary rise that will soon correct itself without needing monetary policy tightening.
While there will be a reduction in the emergency bond-buying that accelerated during the pandemic, the ECB is committed to remaining mostly supportive for the next year or longer. Clearly, the ECB is not looking for ways to take stimulus away like most other major as well as emerging-market central banks. We shall see how much this can impact the Euro and if it is headed for lower value because of the dovishness surrounding it. Expect lots of reaction Monday from the German election results.
GBP ⇓
The pound is slightly down despite a very hawkish tone in the Bank of England minutes from their last meeting. While officials acknowledged there is a slowdown and even lowered their Gross Domestic Product outlook by a percentage point, they are more concerned about inflation and are willing to act in the form of increasing interest rates to combat it.
This is certainly different from how the European Central Bank sees the need to remain mostly accommodative since the pandemic is not entirely behind us, not even close. Sterling could benefit, but any hesitation or delay to act and the currency will falter.
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