The capital avoids emerging markets in spite of record highs on Wall Street and Western European markets. The EUR/USD pair grinds lower to test 1.13, and the US dollar advances against all major currencies.
Since the release of US inflation data, which showed that in October, prices rose at the fastest pace seen in around 30 years and much faster than expected, investors have been fuelled by speculation that the Federal Reserve will put asset purchases on hold sooner and will not wait to raise interest rates next year. In these circumstances, the dollar is the most desirable currency, especially against the euro. All the arguments are favourable for the US currency: stronger, more sustained economic growth, greater energy independence and, above all, a central bank that is much more willing to normalise its policy. The rally is supported by successive data readings that further exacerbate the contrast in the fundamental situation. On Monday, it was the regional economic barometer for the New York area. Yesterday: (much more significant) retail sales information confirms that consumers are not thinking about cutting back on spending at the beginning of the fourth quarter.
Emerging markets currencies trade on the back foot
The source of the poor performance of emerging markets, which have been deeply pushed into defensive mode, is in global markets: the vision of a less benign monetary policy in the US is pulling capital out. The dollar's rally reinforces and amplifies global imbalances, e.g. in the balance of payments. It also threatens to accelerate inflation further while at the same time suppressing economic growth.
We assume that a spike in the dollar's value may be challenging to sustain. Such rapid reshuffles often lead to exchange rates overshooting levels consistent with the fair value of individual currencies as justified by the fundamentals of a particular economy. However, there are no indications that the accelerating trend is about to collapse for the time being. At most, we can count on a pause.
After the abrupt turbulence on global bond markets, a calming of moods should finally come. This may be supported by the lack of first-rate macroeconomic readings in the second part of the week. These will be replaced by a series of speeches by members of the Federal Reserve, who may want to temper investors' over-reaching expectations.
This commentary is not a recommendation within the meaning of Regulation of the Minister of Finance of 19 October 2005. It has been prepared for information purposes only and should not serve as a basis for making any investment decisions. Neither the author nor the publisher can be held liable for investment decisions made on the basis of information contained in this commentary. Copying or duplicating this report without acknowledgement of the source is prohibited.
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15 Nov 2021 9:02
Dollar on a wave of inflation expectations (Daily analysis 15.11.2021)
The capital avoids emerging markets in spite of record highs on Wall Street and Western European markets. The EUR/USD pair grinds lower to test 1.13, and the US dollar advances against all major currencies.
Since the release of US inflation data, which showed that in October, prices rose at the fastest pace seen in around 30 years and much faster than expected, investors have been fuelled by speculation that the Federal Reserve will put asset purchases on hold sooner and will not wait to raise interest rates next year. In these circumstances, the dollar is the most desirable currency, especially against the euro. All the arguments are favourable for the US currency: stronger, more sustained economic growth, greater energy independence and, above all, a central bank that is much more willing to normalise its policy. The rally is supported by successive data readings that further exacerbate the contrast in the fundamental situation. On Monday, it was the regional economic barometer for the New York area. Yesterday: (much more significant) retail sales information confirms that consumers are not thinking about cutting back on spending at the beginning of the fourth quarter.
Emerging markets currencies trade on the back foot
The source of the poor performance of emerging markets, which have been deeply pushed into defensive mode, is in global markets: the vision of a less benign monetary policy in the US is pulling capital out. The dollar's rally reinforces and amplifies global imbalances, e.g. in the balance of payments. It also threatens to accelerate inflation further while at the same time suppressing economic growth.
We assume that a spike in the dollar's value may be challenging to sustain. Such rapid reshuffles often lead to exchange rates overshooting levels consistent with the fair value of individual currencies as justified by the fundamentals of a particular economy. However, there are no indications that the accelerating trend is about to collapse for the time being. At most, we can count on a pause.
After the abrupt turbulence on global bond markets, a calming of moods should finally come. This may be supported by the lack of first-rate macroeconomic readings in the second part of the week. These will be replaced by a series of speeches by members of the Federal Reserve, who may want to temper investors' over-reaching expectations.
See also:
Dollar on a wave of inflation expectations (Daily analysis 15.11.2021)
US labour market confirms Fed stance (Daily analysis 08.11.2021)
Repricing of central banks approach drives the markets (Daily analysis 05.11.2021)
Fed puts asset purchases aside, the decision by the Bank of England on a knife-edge (Daily analysis 02.11.2021)
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