One of the prevailing stories in August was the strength of USD, spurred by positive news from US economic figures. After a long period where the relative state of the recovery in the UK and US appeared to be tied, the US economy appeared to be making major strides ahead. In September, despite a brief knock back from a weak non-farm payrolls figure, the USD has continued its march onwards.
Most of the discussion of the greenback’s primacy has been made relative to the pound, euro, yen or Australian dollar. The effect of having one dominant currency is far more wide-reaching than that, though, and investors in exotic currencies will also be feeling pressure from the USD.
By Patrick Foot, financial markets writer at IG. See the forex listings mentioned below here:www.ig.com/uk/forex-trading
Central Europe is underperforming, with countries outside of the eurozone still feeling the heat from the dollar thanks to their reliance on the European Union. The Polish zloty, Hungarian forint and Czech koruna have all reached record lows against the dollar for the year; other currencies like the Turkish lira, New Zealand dollar and Israeli shekel are all on downward trends against the greenback. Despite a slight reversal as anxiety grew ahead of Wednesday’s FOMC announcement, that pattern appears set to continue.
Traders might be forgiven for detecting déjà vu in recent headlines, after an impressive non-farm payrolls at the beginning of July capped another period of US dominance: signified by a strong dollar, record levels on US indices, and a run of healthy economic indicators.
Now, an even weaker non-farm payroll appears unable to derail US growth. The picture is once again rosy and belief in the Federal Reserve’s pole position in the race to a rate rise is once again the dominant story.
The key question for exotic currency investors, then, is whether the current situation will continue up until the US decides to undertake a rate rise – still unlikely for a few months – or whether the road to economic health has another twist left in it. That question also has an impact on those with a stake in exotic currencies paired with sterling or the euro: a shift in outlook for either of those economies could play out heavily on any pair.
What might instigate a change in US sentiment? The upcoming non-farm payrolls report is probably pivotal, with hope still high despite the last figure dealing a heavy blow. Janet Yellen has indicated that wage rises are key to her decision making process on rate rises, but another weak non-farms report would add weight to her dovish stance.
Beyond that, there are plenty of events and situations that could destabilise America’s return to prominence or give the UK economy – currently still thrown entirely off balance by the Scottish referendum – the edge. Predicting just when (or if) that may happen, as well as keeping abreast of developments in exotic economies, is a balancing act.
Whatever happens over the next few months, at some point in the next year a major economy will almost certainly instigate a change in policy that will be felt by traders everywhere. Whether that change in the status quo is problematic or beneficial to traders is dependent on a carefully selected strategy not just from the Federal Reserve or Bank of England, but from anyone invested in an exotic currencies.
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