We have seen a sell-off in the bond market and a collapse in stocks. Yesterday, it was the turn of the foreign exchange markets to react. The overall strength of the USD took EURUSD below 1.16 at one point, more than a full “big number” drop. No speech on “transitory inflation” from Powell of the Fed and Lagarde of the ECB at a virtual conference yesterday has helped. This genius is well and truly out of the bottle.
Counting losses on Asian currencies overnight doesn’t make reading enjoyable – look away now if you’re of a disgusted temper.
The yen has taken most of the hits, dropping a massive 2.41% in the past 24 hours, and sitting just below the USDJPY112 level. But THB and PHP, both of which have come under heavy pressure in recent days, have also seen strong ask interest, falling 1.66% and 1.29% respectively. For the anecdote, we learn that BSP, the central bank of the Philippines, has been active in the market trying to prevent a breach of 51.0. This level holds for now, but experience suggests that central banks are not very efficient except in the very short term if the market is determined to move in a particular direction. We would be surprised if the IDR manages to maintain its relative outperformance if this dollar strength holds, and the Indian currency now appears to regain its place in the bottom half of the Asian currency chart, after some IPO-induced strength. in the INR in the last month.
We are also seeing tensions on USD bonds from the Philippines and Indonesia. Sovereign bond yields are up 35bp and 25bp respectively since the start of the month. This isn’t exactly evidence of a massive sell-off in emerging markets, but a strengthening US dollar and rising bond yields amidst faltering global growth doesn’t exactly scream “buy emerging markets!”. Caution on this front is therefore certainly justified. As we have seen in the last few days, it takes less than 24 hours for the markets to turn around. So, these are probably not market moves that you can chase once. they started.
A constant theme of recent trade action is the resilience of the Chinese currency. At 6.4783, the USDCNH remains within a fairly narrow range. From a Chinese perspective, and bearing in mind that this is not exactly free float, this may help limit the transmission of the surge in energy import prices. . But it may be creating increasing pressure to normalize with the rest of the Asia FX pack. And that could give rise to tectonic movement later. We have seen a few of these in the markets in recent days, so these should be kept in mind as a risk case, although stability is maintained for now.