Good morning,

One messy market

We wrote a week ago that markets were a bit of a mess following the European Central Bank’s actions of last Thursday – euro flying higher, a dollar starting to crack and all manner of volatility in between. Things have not got any better in the past seven days and yesterday’s capitulation of the USD has moved some to call for the end of the great dollar bull run that has been going since mid-2014.

As we wrote yesterday, the actions of the Federal Reserve to look through strong data and focus on market instability have completely thrown out the narrative that they are ‘data dependent’. It therefore stands to reason that the follow through of strong US data no longer automatically means a stronger dollar. We are not in a position where a decent wage report or growth number is going to hurt the greenback but investors are not going to back a currency if the central bank seems ambivalent to its economic progress.

So the dollar kept on falling with rate expectations pricing in only a 37.8% chance of a rate hike in June compared to a 50% chance at the beginning of the week and, more importantly, no hikes at all that are fully priced in for the entirety of this year.

Of course, market volatility is not just coming from the USD but it is the movement of the USD that is the most frustrating in the short term. Elsewhere, seemingly every central bank announced something in the past 24hrs be it intervention, rate hikes, rate cuts or holding statements.

BOE blinded by the referendum

We’ll get the Bank of England meeting out of the way quickly. So little expectation was built up for this meeting that I nearly forgot it was taking place and only just remembered not to pop out for lunch. The MPC is stuck between a panicked Fed, a European Central Bank eager to change its policy channel from currency and the issue of the UK’s EU referendum. No wonder that their policy statement could easily be boiled down to “get the referendum out the way and we’ll have a better idea.”

Sterling ran higher on this, as some had wagered that some of the more dovish members of the committee may have floated ideas of negative rates. The combination of the boosted pound and the weak USD gave the GBP its biggest one-day jump against the USD since October 2009.

Everyone’s at it

Elsewhere, the collapsing dollar forced the Japanese to intervene twice in USDJPY to at least slow the yen’s advance. Since imposing negative rates on deposits at the end of January the Bank of Japan has seen the yen rise by 8% against the USD.

Similarly the ECB’s Chief Economist has let fly with a comment that must win an award for the most confusing of the year so far. Peter Praet told reporters this morning that the “ECB hasn’t reached the lower bound for the deposit rate yet”. This comes after Mario Draghi last week said that “from today’s perspective, and taking into account the support of our measures to growth and inflation, we don’t anticipate that it will be necessary to reduce rates further”.

Maybe someone is looking at a EURUSD price above 1.13 and starting to sweat?

We also saw the Norwegian central bank cut rates yesterday citing weaker growth abroad, looser policy in the Eurozone and further volatility in oil prices while the South African Reserve Bank hiked rates in the face of markets becoming fearful over further political corruption claims.

What to do?

It is a rough market at the moment and expectations and forecasts are becoming increasingly useless; the benefits of hedging have never been clearer.

Have a great day and a better weekend.

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