Currency Market Analysis

Sep 27, 2021 | Currency Market Analysis

Global Themes

USD

Developments in the Evergrande saga remain a key focus area for investors given the story’s major influence on global risk appetite. This morning, contagion fears have eased slightly, which is why the risk-sensitive Aussie dollar and Norwegian krone are rallying, whilst the safe haven JPY and CHF are tumbling.

Evergrande missed its deadline for paying $83.5mn in bond interest last week and has entered a 30-day grace period but will default if this timeline concludes without payment. This could cause reverberations through financial markets, hence the volatility witnessed across equities, bonds, commodities and currencies last week. China’s central bank continues to inject cash into the banking system to try and reduce liquidity risks and calm market jitters, but with several payments due over the coming weeks, the situation remains fluid.

  • Any renewed fears about Evergrande could trigger further volatility and fuel safe haven demand, with risks skewed to a stronger USD, especially amidst rising US yields in anticipation of tighter US monetary policy following the Federal Reserve’s meeting last week.

GBP

Due to the pandemic and Brexit combined, the UK is suffering more than most nations when it comes to supply chain issues. The UK’s retail, hospitality and transport sectors are all struggling to find staff, which has led to an increase in prices and a shortage of fuel across the country. The British pound is on the backfoot against most currencies this morning as a result.

Panic buying across the UK amidst fears of fuel shortages, has forced the government to take emergency steps to ease the pressurized situation. Competition rules in the sector have been suspended so that companies can share information. There are plans to issue short-term visas to entice truckers back from Europe after a mass exodus since Brexit. The Army might even be brought in to drive trucks of fuel as a last resort. Meanwhile, UK-EU tensions continue to flare as the UK government refuses to implement its Brexit deal. Despite the modest rally in global risk sentiment this morning, the pound remains under selling pressure, highlighting the influence of the domestic and political issues haunting the UK at present.

  • Looking ahead this week, eyes turn to monthly UK GDP data this Thursday and any updates regarding the Evergrande story given sterling’s sensitivity to global risk sentiment. The end of the furlough scheme is also in the spotlight as month-end looms. GBP/USD remains firm above $1.36, but a break lower significantly increases the downside risk. GBP/EUR is still flirting with €1.17 as the euro slips slightly amidst the German election results.

EUR

The two major parties - Social Democrats and the conservative CDU/CSU bloc – have claimed to have won a mandate to form a government in an historic German election. The market response has been nearly non-existent though as it could take months for negotiations to deliver what is expected to be the country’s first 3-way coalition.

Coalition negotiations will get underway with much depending on the smaller Green and FDP parties and whether they decide to team up with a CDU/CSU-led government or with SPD. The Greens have scored the best election result on record in a sign that voters are taking climate change more seriously. Meanwhile, CDU/CSU lost nearly 9 percentage points off their 2017 election share whilst SPD gained 5.2. It will likely take several weeks at least to generate a viable government, which is why the market hasn’t reacted negatively to the deadlock just yet.

  • The euro has dipped under $1.17 against the Us dollar and may come under further selling pressure if the coalition talks become even more volatile and uncertainty persists over the coming days and weeks. Meanwhile, a slew of Eurozone economic data drops in throughout the week, with most eyes on flash inflation this Friday. 


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