Market sentiment improves but will commodity-dependent currencies continue to strengthen?

Enrique Díaz-Álvarez18/Apr/2016Currency Updates

The global financial markets were in a rather optimistic mood last week. Commodity prices rose, led by oil, and currencies that are generally seen as riskier, such as the South African Rand, the Brazilian Real and Sterling, strengthened.

This was due to investors’ willingness to take on more risk again and buy these assets at the cheaper prices they were at following developments in the first quarter. This could be a sign that the markets regard them as having been undervalued. It was hard to pinpoint any specific data point last week that drove the buying, which is unusual, but perhaps the better-than-expected economic news out of China was the key factor.

However, major news hit the wires over the weekend. Oil producers failed to agree on a production freeze at Doha. While we don’t expect this news to have a massive impact on the Euro, US Dollar and Sterling, commodity currencies including the Australian and Canadian Dollar as well as emerging market currencies could be in for a rough trading day today, particularly given the optimistic expectations built in their respective rallies.

Over the medium-term, the two things that businesses with exposure to international currencies should continue to watch above all other factors, in our opinion, are central bank decisions and political developments.

We’ll follow closely the European Central Bank meeting this week, from which we expect indications rather than actions.

And, of course, the Brexit. Last week market odds for an EU exit dipped to just 25%, which has enabled Sterling to recover somewhat.

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Major currencies in detail:


Sterling was buoyed last week by fewer Brexit concerns and stronger-than-expected CPI data, which brought UK annual core inflation up to 1.5% from 1.2% the previous month. As a result, the Pound ended the week higher against all other European currencies as well as the US Dollar.

The Bank of England meeting on Thursday turned out to be a bit of a non-event and therefore it didn’t move the markets.

Looking ahead, markets may take a break from focusing on a potential Brexit this week, as the labour report is due to be published on Wednesday. Any upside to annualised wages, which are anticipated to come out at 2.2-2.3%, would lead markets to bring forward their expectations for interest rate hikes by the Bank of England. These hikes have recently been pushed back all the way to 2020.

This development would support Sterling, which is currently trading at rather cheap levels against the US Dollar.


The common currency retreated from the top of its recent range last week, weighed down by weak February industrial production data and dovish communications from ECB officials, which reaffirmed their commitment to an extremely loose monetary policy.

This week is the April ECB meeting. The central bank is universally expected to leave policy unchanged. Focus will be on the statement and post-meeting press conference.

Markets will be eager to hear Draghi’s response to the increased emphasis on fiscal loosening by transnational institutions such as the IMF and the council’s reaction to the recent Euro strength, with any potential impact on future monetary policy.

The recent strengthening of the single currency isn’t in line with ECB objectives as it creates deflationary pressure by making Eurozone exports more expensive.

We expect Euro trading on Thursday to be very volatile, both during and after the ECB meeting.


The US Dollar showed mixed performance last week, rising against most European currencies but losing ground against most others as risk appetite returned to the financial markets.

Retail sales were weak but the weekly jobless claims figure hit a new historical low. It’s hard to see any real risk of a recession while the US job market continues to perform strongly.

This week contains few major releases out of the US and just one FOMC member speaking about monetary policy. The US Dollar will likely hold its current range until Thursday´s ECB meeting.


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Written by Enrique Díaz-Álvarez

Chief Risk Officer at Ebury. Committed to mitigating FX risk through tailored strategies, detailed market insight, and FXFC forecasting for Bloomberg.