The US Dollar is clearly the king in the FX market. It’s been on a strong year-long uptrend, and nothing seems to be enough to stop it yet. Everything began first with the Democrats winning the majority in the Senate, after the elections in Georgia back in January 2021 resulted in a 50-50 split in the Senate with a tiebreaking vote from Kamala Harris.
From there the market expected more fiscal stimulus from the Democrats and coupled with supply chain issues and the already huge monetary stimulus by the Fed, it led the market to start worrying about inflation and an earlier Fed pivot. This Fed pivot came in June 2021 as such a hawkish meeting caught the market off-guard and gave the US Dollar the ultimate tailwind to start its massive appreciation.
High inflation and aggressive monetary tightening caused a big global growth slowdown and general risk aversion. All of this favours the US Dollar as it thrives both when the US economy outperforms its peers or when there’s a synchronised global slowdown as the USD Smile Theory states. The USD got a boost not only from an aggressive Fed but also from its safe haven status.
In such bad times the worst performing currencies are generally the commodity-linked ones like the AUD, the NZD and the CAD as the global slowdown weighs on commodity prices ultimately punishing more the countries that export them. The best performing currencies are generally the other two considered as safe havens like the CHF and the JPY.
Here's when the context plays a big part though. The CAD is the second-best performing currency after the USD because high energy prices coupled with an aggressive BoC gave the Loonie a big boost. It’s still a loser against the USD but not as much as the AUD or the NZD. The other famous safe haven currency, the JPY, is one of the worst performing currencies. It’s been slaughtered for months because of the huge divergence between the BoJ dovish stance and the other central banks hawkish one. This created a big rate differential that favoured even the commodity currencies against the yen.
Now that the market is shifting its focus more to the recession, the commodity currencies and those in an awful situation like the EUR will lose the most against the USD, while the safe havens like CHF and JPY will lose the least and at some point even start to appreciate against it once the market will sense a pivot in Fed policy.
This article was written by Giuseppe Dellamotta.