FxWirePro: Impact of Fed and other G10 central banks on FX commodity bloc in 2109

Not just in the US rate expectations have fallen significantly over the past weeks. This phenomenon can be witnessed in almost all G10 countries, a development that makes complete sense in view of fears of the global economy slowing.

Crude oil prices are rallying and hence, contributing to some of the commodity currency gains. WTI and Brent are both up by over a buck.

The economists consider these concerns to be exaggerated so that the rate expectations and also the currencies – in our view mainly NOK, AUD and CAD – should recover. 

This is particularly the case against the US dollar, which admittedly seems a little paradoxical, the rate expectations in the US should also recover. And we do indeed expect that. 

Some US economic experts expect a further two Fed rate steps this year, whereas the market is currently not expecting any. The difference for the currencies is based on the fact that the Fed is in a completely different phase of the rate hike cycle than the other central banks. Whether it hikes its key rate another two times or not, the rate hike cycle is likely to come to an end this year. The FOMC minutes from December’s meeting suggest that Chair Powell and colleagues are going to take a “patient” approach to further monetary tightening, which has certainly been a message that FOMC members have delivered in recent speeches.

The Bank of Canada and Norges Bank on the other hand have only just started hiking interest rates. CAD is among the appreciating crosses ahead of the BoC but isn’t particularly outperforming comparators like the A$ or Mexican peso as the US Treasury yields are slightly higher along with Canadian yields.

While the Reserve Bank of Australia has only been talking about rate hikes so far but has not yet taken action. 

AUD underperformance over the past month is consistent with the cooler outlook for global growth, with China especially in focus. However, Australia’s commodity price basket is about flat over that time. Yield differentials may be key in coming weeks, after sharp gyrations around year end. The 2019 base case of further Fed tightening and a steady RBA cash rate should leave AUDUSD finding support on dips towards 0.70 and finishing Q1 around 0.71 levels.

As a result a normalisation of monetary policy has not yet been sufficiently priced into these exchange rates. Courtesy: Commerzbank, Westpac

Currency Strength Index: FxWirePro's hourly AUD spot index is inching towards 113 levels (which is bullish), CAD is at 34 (mildly bullish) and hourly USD spot index has bearish index is creeping at -57 (bearish) while articulating (at 12:38 GMT). 

For more details on the index, please refer below weblink: http://www.fxwirepro.com/currencyindex