The foreign exchange markets were prone to excess volatility. Increased volatility in currencies of emerging economies. Emerging market currencies reacted strongly to recent developments in North America and Europe. These US dollar gains have been stunningly swift. In particular, it has rallied against the Mexican peso, getting close to MXN18.49 and scoring its sixth day of straight gains. At the same time, the euro has struggled with the recent plunge back under the $1.1615 area — testament to still considerable uncomfortable markets. Investors are preparing for highly influential economic reports, including the US Consumer Price Index (CPI) and Canada’s retail sales data. The economic landscape is ever evolving and still very much in flux.
The dollar’s sharp rise has been the story, climbing for the fourth straight session in DXY to a fresh multi-decade high. As this trend indicates, the dollar is continuing to strengthen against a number of other major currencies. In Colombia-U.S. relations, we wrote earlier this month about how things got frosty between Colombia and the U.S. The peso’s decline highlights concerns regarding trade dynamics and geopolitical factors affecting Mexico’s currency stability.
The euro has had a very uneven performance. It fell under the key 61.8% retracement of the gains it made on the month so far. US two-year yield approaches three-year lows. This drop is pushing the US premium over German bonds to just above this year’s low of ~150 basis points. These types of influences have understandably made investors wary about European currency movements.
Moreover, the Japanese yen has moved sharply in reaction to overall market moves. Inclusive of today, the yen has dropped 12% against the dollar just in the first four months of the year. It rebounded, rising almost 9.5% through early October. Japan’s recent trade deficit of JPY235 billion in September mirrored August’s shortfall, indicating ongoing challenges for the Japanese economy.
The British pound came under pressure yesterday. It fell all the way to just above $1.3360, not far above a 50% retracement of last week’s bounce. The UK’s consumer price index (CPI) was unchanged this September. It registered just a 0.4% cumulative rise for the third quarter. With the recent flatlining of inflation data has come much speculation on what, if any, changes in monetary policy the Bank of England should make.
At the same time, the Canadian dollar hit a session low around CAD1.4000 after hot CPI. The unexpected inflation number raised eyebrows regarding the Bank of Canada’s upcoming interest rate hikes. This turn of events only served to complicate the Canadian dollar’s performance against its peers.
In Asia, the Chinese yuan was a picture of calm. Retreating to an initial monthly low below CNH7.1160, the dollar eventually rebounded above CNH7.1250, supported by the overall stronger dollar constellation. The yuan’s movements reflect ongoing concerns about China’s economic recovery and its impact on global trade dynamics.
The Australian dollar was strong, hitting US$0.5760 this morning, a level not seen since October 9. This increase overshot the (61.8%) retracement of this year’s rally found near $0.5730, indicating positive sentiment among traders regarding Australia’s economic outlook.
Investors are now looking ahead to important economic indicators that could impact currency movements over the next several days. The US CPI for the first half of October is set to be reported tomorrow, which will provide insights into inflation trends and potential implications for monetary policy. Canada’s retail sales figures for August are due out shortly as well. Together, this data will deliver a unique look into the economic activity occurring across North America.
Mexican economists expect a small increase in the IGAE August economic activity indicator. This comes after an alarming drop of almost 0.90% in July. While a rebound in tourist arrivals is small consolation for the peso, the surge would offer temporary relief as policymakers take stock of the country’s economic direction.