There is no doubting that currency volatility has picked up dramatically in the last few weeks. Whether this is the new ‘old paradigm’ or just a blip is yet to be determined. Logic however would suggest that this is just a blip and we will have a reversion towards the new mean. There is still a huge amount of central bank liquidity sloshing around out there, and this should keep volatility in check. Still.. this is what you get when the world’s largest central bank prepares to pour the happy juice out of the punchbowl.
I suggested in the blog following the FOMC announcement that the spike sell off of the USD might be a low which could remain unchallenged for some time to come, and while that USD low has held for most currency pairs, it failed for NZD/USD overnight. There could be an idiosyncratic reason for a new US dollar low (or more correctly NZD high) to occur, but so far I have been unable to determine one. However, as a consequence, I have slightly reduced my level of conviction in the view that the US dollar rally will continue from here. It probably will, but I wouldn’t have expected a new weeks high in NZD/USD.
With elections imminent in Nigeria, one of the credit rating agencies Standard & Poor’s has downgraded the emerging giant one notch, reasoning that there are increased risks associated with the country because of the impact of lower oil prices and rising political tensions. I don’t think anyone can argue with that. The legislature recently agreed to drop the budgeted price for crude from $65 to $53 per barrel which is sensible and more realistic, but it’s going to be interesting to see if the political will exists to construct a budget consistent with this number. There are tough tough times ahead in Nigeria.
There is precious little data out today. We will monitor the major currencies to see how they trade on their own merits. This morning the US dollar has started off strongly against its main rivals, as I’ve mentioned before we need more data to get a better sense of where we go from here. But it is entirely possible that for now, the Fed’s acknowledgement that a stronger currency from here could restrain the pace of rate rises. This might be in play, acting as a restraint on the mighty greenback..
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