My take on currency price action year to date
Currencies caught in 'hike/no-hike' see-saw
This is a chart overlaying 'major' currency pairs starting from first FOMC interest hike last December.
- Tight cluster, close positive correlation between NZD, AUD, SGD, EUR and CAD.
- This group displays 3 clear short term trends first weakening against the USD following the first rate hike in Dec, strengthening from turning point A late January and then weakening from late April.
- These three trends can be characterised as hike - no-hike - hike which are in turn driven by a Fed that is hawkish - dovish - hawkish in a span of 6 months.
- As a result, NZD, AUD, SGD and EUR are near unchanged against the USD since Dec.
- JPY was different right from the beginning, persistently strengthening.
- GBP is clearly the worst performer but also appears to be in a world of it's own (affected by narrative from Brexit).
- Going short GBPJPY, NZDUSD, AUDJPY, USDJPY are YTD best performers.
Current leg since end April
- Fed change from dovish to hawkish drives USD strengthening. Technically this coincided with DXY hitting and rebounding from 2015-low of 92.6. (There is a comprehensive analysis written here on 29 April, log-in required to access.)
- This current trend should persist if a. Fed delivers rate hike in June b. Fed delivers bigger hike than expected c. Fed assures market that that are more hikes coming d. market believes the Fed. In other words, there must be solid reasons for the market to believe that the USD will appreciate more.
- In this case, AUD is the weakest (short AUDUSD).
- GBP strength may not be a function of USD expectations. It is more likely due to dynamics to do with Brexit (see point 6 above).
- Good crosses to look at are GBPAUD, EURAUD and AUDSGD.