Currency affairs: Forex markets spring to life

A blast from the past as suddenly market worries about currency values have joined rising inflation in making a comeback as the topic of the day in a re-run of what was in vogue for financial markets during the 1970s, ’80s and ’90s.

The Fed’s 0.75% rate rise dominated events last week and will do so again this week, but it also helped trigger three major moves in forex markets which in turn told a us a lot about the health of the global financial system.

Rate rises from other central banks such as Sweden’s 1% and the Bank of England’s 0.5% were bit players – the two biggest factors were the new UK government’s tax cut and energy subsidy statements, which triggered another sell off in sterling. That, however, came after the surprise intervention by the Bank of Japan to stop the yen continuing to fall to 20-year lows against the greenback.

Sterling fell more than 4% against the dollar to below $US1.08 (it recovered that level in late trading but still was at 37-year lows), its lowest point since 1985, after UK chancellor Kwasi Kwarteng took a huge political gamble with his debt-financed package of £45 billion in tax cuts and 100 billion pounds or more of subsidies for energy users for the next two years.

The US dollar hit new multi-year highs against the euro and the pound sterling, while the yen traded hesitantly as dealers watched for a repeat of the intervention from the Bank of Japan that happened late in Thursday’s day session in Tokyo.

The dollar index hit a new 20-year high and was up 1.2% at 113.02 after touching a 20 year high of 113.33. The euro sank to 0.9690 (and touched a low of 9668) to the US dollar.

The Aussie dollar fell under 66 US cents to close Saturday morning at 65.33 US cents and looking to go lower – it is still well above its most recent low of just over 57 cents in early 2020 as the first wave of the pandemic swept the world. That’s when the Aussie touched a low of 65.11.

The Aussie dollar is down around 10% against the greenback since the start of 2022, (the yen is down 25%) and the euro is off nearly 15% while sterling is off just on 20%.

On a trade weighted index, the Aussie dollar is only down 2% because of the sharp rise by the US dollar against other currencies. That’s why you should ignore any headlines or commentaries that claim Australia has a ‘currency crisis’

Watch the clickbaiters among economists, analysts and media writers rush to highlight the weakness in the Aussie currency without (again) understanding that it’s all due to the rise in the value of the greenback and not Australian economic or business policies.

They will all forget that for a major exporting economy, the weaker Aussie means a surge in export revenuers, even as global prices weaken.

Sterling’s fall continued the weeks of weakness thanks to the confusion over the leadership of the country and then the rushed economic statement on Thursday which completely floored markets.

As a result, the pound found new 37-year lows at just above $US1.07 to just above $US1.018, the euro tested lows against the dollar, below 0.98 US cents and the Bank of Japan intervened for the first time in more than two decades to arrest the year’s continuing slide – which is all home grown because of the BoJ’s loose monetary policy.

Japan is the next pressure point (apart from Sterling, which isn’t a top tier currency any more, though). The Bank of Japan (BoJ) wants to put an end to the yen’s slide against the greenback (down 25% since January 1).

It intervened in the market for the first time since 1998 to protect the 145 JPY/USD mark. Forex dealers wonder how the BoJ can hold the yen under that level, while continuing the loosest monetary policy stance in the developed world.

The Fed’s determination has broken the last walls in the bond market. The yield on US 10-year debt rose from 3.47% last week to 3.77% on Friday. The yield curve is still inverted with the 2-year maturity paying 4.24%, a continuing belief that a recession is coming in the US, or at best a bad case of stagflation.

In Europe, the trajectory is identical, with more pronounced increases among issuers considered less qualitative. Swiss debt is at 1.37% over 10 years, the German Bund at 2.04%, the French bond at 2.62% and the Italian BTP at 4.31%. The British Gilt is at 3.76%. The Australian 10-year treasury bond was at 3.90% on Friday.

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