The relative strength of currencies, key economic indicators, and central banks’ policy actions all have a bearing on global dynamics. Recent developments in major economies have left many traders and experts of global financial conditions puzzled.
Ranging from the United States’ solid growth in manufacturing sector activity to Japan’s worries over its rising currency and India’s burgeoning forex (foreign exchange) reserves, the world’s largest economies appear to be sending mixed messages about each other’s financial health.
The latest global developments come at a time when the world’s financial markets are focusing their attention on central banks and trying to anticipate the next move central banks might make.
Recent economic signals originating from large economies seem to at least partially contradict each other.
Forex Trends: US Dollar Improves
Meanwhile, the dollar improved on Monday in response to the news that the US manufacturing sector grew in March for the first time since September 2022.
The yen is also still under 152 per dollar, and that – there is the potential for an overbearish exchange intervention on the horizon.
The Institute for Supply Management (ISM) reported that the US manufacturing sector expanded in March, the first such growth in 18 months.
Forex Trends: Raw Materials Affect US Economy
This is thanks to a rebound from December’s collapse in production and an increase in new orders. At the same time, manufacturing remained understaffed, and raw material costs continued to rise.
The growth marks an end to a 16‑month decline in manufacturing, which employs 10.4% of the US economy, the longest stretch of falling production from August 2000 to January 2002.
The dollar index, which pits the greenback against six of the world’s major currencies, rose 0.469% to 104.97, and bets on a Fed rate cut in June, which had been riding on data showing US inflation slowing, dropped – though the decline, according to the CME FedWatch tool, was not as sharp as it had been a few days ago.
According to a report from the Commerce Department’s Bureau of Economic Analysis, the personal consumption expenditures (PCE) price index rose 0.3% in February, slightly less than the 0.4% rise economists had expected.
Forex Trends: Central Bank Considers Higher Inflation
Fed Chair Jerome Powell had recently indicated that this was exactly what the central bank would look for in a trend towards higher inflation while leaving open the possibility that the Fed could continue to loosen policy even after funds rates have risen above the 2% level.
This would open up the possibility that the rally in so-called risk assets that we have seen in 2019 could continue.
Forex Trends: Market Snapshot
Gold prices touched fresh record highs on Monday, with fears over unrest in the Middle East tempering risk appetite and sending Wall Street stocks two-tenths of a percent lower from their own near-record levels, although US Treasury yields rose for a third day as the dollar gained while Commerce Department data showed the economy continuing to expand.
The upbeat figures came a day after minutes from the US Federal Reserve’s May policy meeting showed policymakers still willing to cut interest rates if recovery falters – although that prospect appears to be dimming as signs of US economic strength multiply.
Forex Trends: Yuan rises on China Stocks
Chinese shares rose about 1% to lead gains in most of Asia overnight as a generally buoyant outlook on the global economy continued to buoy stock markets across the world’s major economies.
Japanese shares dropped as the yen traded just shy of levels that would likely trigger fears of government intervention.
Reports that the US manufacturing sector had expanded for the first time since September 2022 pushed the dollar higher and left the yen below the psychological level of 152 per dollar, where nervous traders feared the prospect of intervention would start to bite.
The dollar index, which gauges the greenback against six other major currencies, rose 0.55%.
Oil prices were close to five-month highs on the back of supply tightening from OPEC+ cuts and attacks against Russian refineries, while China manufacturing numbers signaled an upbeat prospect for demand.
Forex Trends: Fed on Inflation Figures
Fed chair Jerome Powell on March 29 signalled that the central bank remains comfortable with the numbers on inflation, suggesting that there is no need to rush to raise or lower interest rates.
This echoes the approach the Fed took in the 1970s, when its premature rate cuts made the great-inflation problem even worse.
In addition to the S Korean bond market closing, the stock market also lost major points: the Dow Jones Industrial Average closed down 2.4%, the S&P 500 dropped 4.1%, and the Nasdaq Composite closed down 5%.
Since Monday was also a holiday, European markets were closed as well (and several global markets closed Friday).
On the back of an expected softer US monetary policy following Friday’s release of the personal consumption expenditures (PCE) price index, gold flew to an all-time high, with US gold futures edging up 0.93% to $2,238.10 an ounce.
Forex Trends: Treasury Yields
Treasury yields rose as strong manufacturing data raised the bar for the three-quarter-point interest rate cuts that the Federal Reserve had signalled at its last policy meeting.
The yield on two-year notes rose four basis points to 1.614%. That on 10-year Treasury notes gained one basis point to 2.061%.
Forex Trends: Nikkei Index Drops
The Nikkei index dropped in Japan, where fears of currency intervention to support the yen in light of Abe’s comments were showing up on markets, sapping the profits of exporters and returns for foreign investors.
Earlier comments from a currently telecommuting head of corporate accounting at a big manufacturer in Nikkei’s latest quarterly survey indicated that expectations of improved sentiment had been replaced by a decline in big manufacturers’ business outlook, although the index had been trading notoriously close to the Nikkei’s recent peak.
Meanwhile, some investors saw April 1st as a good day to cash out some profits.
Oil prices rose on the back of the adjustments of the general market to the global economic data and policy expectations: US crude and Brent prices closed higher.
Forex trends: Yen in Focus
The currency market has been watching the yen as it crept past levels last seen in 1990 amid fears that Japanese officials might step up intervention to prop up the value of their currency.
The yen broke through a 34-year high versus the dollar which raised speculation about Japan’s currency strategy.
While the end of the fiscal year and the end of March on the calendar were able to lessen the urgency of the risk that yen moves posed to the balance sheets of Japanese companies and investors when they are reporting fiscal year-end results.
The fact that finance officials had to hold an emergency meeting and put out a statement about the yen further suggests that they are carefully monitoring recent yen moves.
Forex Trends: Chinese Yuan Surging Against Dollar
Meanwhile, the Chinese yuan also dropped against the surging dollar, despite signs of recovery in China’s economy and the central bank’s efforts to prop up the currency.
The euro and the British pound, Europe’s two other big-ticket currencies, declined against the buck.
But bitcoin and ether, the leading cryptocurrencies, moved mixedly, revealing the varied reaction among financial markets to the latest economic data and policy expectations.
Russia’s central bank devoted the whole of its March meeting to the question of whether it should keep its key interest rate unchanged at 16%, saying on Monday that it found a lower reduction in the inflationary pressures expected through the end of 2023.
Forex Trends: Russian inflation
Bank of Russia meeting minutes, revealed on Tuesday at its own initiative, said that, in order to further reduce inflation, it ‘may be necessary to raise real interest rates’.
The central bank reiterated warnings against cutting rates prematurely, stressing that doing so would give rise to a new wave of inflation that would be more difficult to moderate.
The week ending on March 22, marked the fifth week in a row, that saw an ever-increasing level in India’s foreign exchange reserves at a new peak of $642.63 billion, as per the latest Reserve Bank of India (RBI) data available on Friday (March 22).
Over the previous week, there was an increase of $139 million in the forex reserves.
Forex Trends: Reserve Bank of India
Changes in the foreign stock of currency are further reported and account for capital gains or losses due to valuation changes of the foreign parts of reserves.
Reserves include India’s share in the IMF’s Reserve Tranche.
The Reserve Bank of India (RBI) manages the foreign exchange market to curb excessive fluctuations in the value of the rupee. The rupee was worth 83.40 versus the dollar on Thursday. India’s markets were closed on Friday.
Japan’s finance minister Shunichi Suzuki on April 1 expressed new concern about speculative activity in the foreign-exchange market that he said bears little relation to economic fundamentals – echoing warnings he’s already issued against a plunge in the yen’s value.
Addressing a parliamentary session on April 1, Suzuki said his government was ‘determined to respond resolutely against speculative swings in the foreign-exchange market that are unwarranted by economic fundamentals’.
He added that ‘no options would be left out’ when responding to unwarranted moves in the market, reiterating comments he’d already made on Monday.
Forex Trends: Yen Affecting Forex Traders
Suzuki said the movements of the yen were the result of multiple elements, such as the Bank of Japan’s (BOJ) recent decision to reverse negative interest rates, the current account status, market prices, geopolitical considerations, and market sentiment and speculative trading.
In particular, he noted that ‘bid-ask spread’ speculative trading is the factor that contributes negatively to the depreciation of the yen, which does not reflect the current economic and price movements in both domestic and international terms.
This is even though the Bank of Japan this month (19 March) called time on an eight-year run of negative interest rates.
Forex Trends: Yen at lowest against USD
On Monday, the yen was at a 34-year low against the dollar, having slid record lows all last week, and was trading at 151.315 to the dollar on Monday morning.
Because the BOJ’s policy rate remains near zero – and with the US-Japan interest rate differential expected to remain broadly positive going forward – analysts say, there is still a rationale for the sell-off.
Asked whether the yen’s dramatic fall after the BOJ’s retreat from negative rates had met or exceeded expectations, Suzuki would not say.
It’s normal for the yen to fluctuate based on normal market moves that reflect fundamental economic conditions, but swings come when they shouldn’t.
Forex Trends: Emergency meeting
After an emergency meeting of Japanese monetary authorities took place last Wednesday, a day sooner than scheduled, to discuss steps to support the yen following a seventh consecutive day of losses, the officials issued the strongest rebuke of the yen’s weakness since last year.
Both the hastening of a central bank meeting and the subsequent intervention decisions indicate that Japanese authorities are taking a much more hawkish position on maintaining yen stability.
Japan had intervened twice before in the currency market this year, once in September and again in October, when the yen had weakened to about 152 per dollar, signaling a willingness to take direct action to support the currency.
