Written by Convera’s Market Insights team
High yielding dollar crushes yen
George Vessey – Lead FX Strategist
The US dollar started 2024 as the highest yielding major currency and continues to benefit from this advantage along with the relatively strong US economic growth outlook. US rate cut prospects have spurred massive gains for equities, but the scaling back of easing bets over recent month have also strengthened demand for the dollar. Meanwhile, despite the Bank of Japan (BoJ) hiking rates last week, the yen has hit its weakest level since the middle of 1990.
Amidst the US dollar’s rate advantage and the extremely low levels of realised and implied FX volatility, conditions are increasingly favourable for carry trades – borrowing a low yielding currency in favour of a high-yielding currency. The prospect of less volatility when combined with the extremely high level of risk appetite, think equities rallying to all-time highs and Bitcoin surging over 100% this year, is a reason to expect carry trades in the FX space to continue gaining traction. This is why USD/JPY has rallied over 7% this quarter, making the yen the worst performing major currency so far this year. While the BoJ raised interest rates for the first time since 2007, markets now believe the next hike may be some time away, so it seems the only way to halt the yen’s sell-off is if Japanese authorities intervene.
Japan’s finance minister issued his strongest warning to date about yen weakness as USD/JPY enters into a zone that triggered official FX intervention over a year ago and saw the yen rally around 4% in one day against its major peers.
Sterling softens but seasonality looks supportive
George Vessey – Lead FX Strategist
As March and the first quarter of 2024 peters out, let’s evaluate the pound’s performance, some key factors driving price action, and what could play out over April. At present, GBP/USD is trading just above $1.26 – flat on the month and almost 1% down on the quarter, while GBP/EUR is trading below €1.17, down 0.2% on the month but over 1% up on the quarter.
Market pricing of central bank policy easing has had the most influence on sterling, but volatility, both realised and implied has been unusually compressed. GBP/USD realised 3-month volatility illustrates this effectively given it’s near 10-year lows. Sterling started the year as the best-performing G10 currency thanks to the relatively hawkish pricing of Bank of England (BoE) policy expectations compared to other major central banks. This period of low FX volatility also encourages carry trades, which has supported the high-yielding pound relative to many other major peers. But there’s been a convergence in pricing lately and following the BoE’s dovish vote split last week, markets have even started pricing a higher probability (25%) of a rate cut as early as May. Prior to this, it looked like GBP/USD was going to test $1.30 after a bullish breakout to 7-month highs at the start of March. However, the currency pair retreated over three cents in two weeks, from around $1.29 to $1.26 – bouncing off key moving averages. The currency pair has been trading below $1.30 now for 180 days straight – its third ever longest stint below this psychologically important level.
Stretched bullish GBP positioning remains a strong headwind for the pound, but seasonality patterns look favourable. Historically, the pound performs the best against the US dollar in the month of April. Over the past two decades, GBP/USD has risen, on average, by 1.2% in April. One theory behind this seasonal trend is an increase in incoming capital to the UK driven by dividend payments to British shareholders from foreign companies and other investment inflows that mark the start of the UK financial year.
EUR/USD extends steady decline
Ruta Prieskienyte – FX Strategist
Although largely brushed off by markets, the latest GfK survey showed that German consumer morale improved for the third consecutive month, albeit from depressed levels. It was the highest reading since the start of the year, reflecting modest rises in income expectations and economic prospects. However, the propensity to buy was little changed, lingering at a very low level in almost two years. The recovery of the consumer climate is progressing slowly and very sluggishly, indicating that a sustained recovery of the German economy will remain a long time coming. The IMF forecasts Germany to grow by only 0.5% in 2024, almost half the pace of the Eurozone bloc.
EUR/USD was unable to breach past the 200-day SMA resistance level at $1.0836 as the pair remains in a short-term downtrend channel. In the near-term, further weakness should be contained around March lows of $1.0800. There are no signs of FX volatility picking up as of yet and EUR/USD 1-month realized vol continues to hover near 26-month lows.
Earlier this morning, Riksbank was the last G10 central bank to hold its rate decision this month. As widely anticipated the central bank left its key policy rate steady at 4%, but said it is likely that the borrowing cost can be cut in May or June if inflation prospects remain favourable. The bank also revised its projections for the policy rate lower. The key interest rate is now seen at 3.8% this year, below 4.1% seen in the November, before falling to 3% in 2025 (vs 4%) and 2.7% in 2026 (vs 3.6%). Dovish central tilt puts SEK under pressure, with both USD/SEK and EUR/SEK holding at 4-month highs.
GBP/USD and EUR/USD in bottom quarter of 7-day range
Table: 7-day currency trends and trading ranges
Key global risk events
Calendar: March 25-29
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*The FX rates published are provided by Convera’s Market Insights team for research purposes only. The rates have a unique source and may not align to any live exchange rates quoted on other sites. They are not an indication of actual buy/sell rates, or a financial offer.
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