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Currency Market Analysis

Jun 16, 2022 | Currency Market Analysis

Global Themes

The Swiss franc soared more than 1% after the country’s central bank raised interest rates, gains that were compounded by renewed global growth fears that weighed on stocks. The greenback steadied, while the euro and Canadian dollar fell anew. Sterling tumbled after the Bank of England opted for a gradual 25 basis point rate hike to 1.25%. The mood dimmed Thursday as markets considered the downside of more and more central banks raising rates aggressively to get control of runaway inflation. The Fed raised rates by a massive 75 basis points this week, lifting the fed funds rate to 1.6%. But the Fed also forecast weaker growth and higher inflation and unemployment that did little to allay recession risks. In Europe today, the Swiss National Bank shocked by raising its key rate to -0.25%, the first hike in 15 years, from -0.75%.

EUR

Euro back at 1-month lows

The euro wilted back toward one-month lows against the greenback as worries about moderating global growth whet appetite for safer bets like the greenback. The euro’s decline served as a reminder of its fragile underbelly, given expectations for the ECB to move more gradually in raising interest rates as it seeks to avoid so-called fragmentation risks in which borrowing rates for debt-choked countries like Italy and Spain spike to worrisome levels, potentially sowing the seeds for another debt crisis.

GBP

Sterling falls after dovish BOE rate hike

Sterling kept to its highly volatile ways as it skid after a divided Bank of England underwhelmed with a quarter percentage point rate hike to 1.25%. The doves outnumbered the hawks as six officials voted for the 25 basis point hike, while the other three favored a more forceful 50 basis point increase. The UK central bank sketched a rougher road ahead of the economy which it sees contracting in the second quarter with inflation now seen topping 11% in October. While the door remains open to further rate hikes, it appears to be slowly closing given mounting growth risks.

CAD

Weaker oil, lower C$

Stocks on the back foot and oil at $113, a two-week low, weighed on the Canadian dollar which stuck near one-month lows. The loonie rose against the greenback Wednesday despite the Fed delivering its most impressive rate hike – a 75 basis point bump to 1.6% – in 28 years. The C$ and broader markets had cheered the Fed’s assertion that such a large rate hike was the exception and not the norm. But growth worries resurfaced the morning after the Fed, particularly after its forecasts penciled in rate cuts starting in 2024.


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