Much has been made of the economic implications of today’s anticipated ECB interest rate increase, not least the fact that it’s likely to make matters worse for the periphery, rather than better. Nevertheless, there are two reasons why at least in the short-term, it’s of significance for FX.
Guest post by FXPro
Firstly, the ECB is moving ahead of the Fed, which is a first as, throughout its twelve year history of setting rates for the eurozone, it has invariably lagged the Fed in both tightening and easing cycles. This is the primary reason why the euro performed so well during the first quarter, despite the disappointing news on the underlying credit crisis and the EU’s attempts to resolve it.
Secondly, it’s the fact that interest rates differentials are widening. This has already happened, given the substantial widening of market interest rates that have been seen as markets have factored in the expected ECB tightening. If we look at Australia, where the tightening cycle started in October 2009, the Aussie dollar has appreciated some 25% vs. the USD over that time. For the moment at least, there are few reasons to think that the ECB is poised for the beginning of a tightening cycle of a similar magnitude. There are several unique reasons why Australia has managed to pull away, not least the fact that it was far less affected by the financial crisis and also it has benefitted from the rise in commodity prices and its integration with the faster growing Asian nations.
Australia is the more extreme example of the fact that diverse economies (or areas) have been affected to different degrees by the events of recent years. Some are emerging pretty much unscathed, whilst others are only part way down the process of repair. This is fair normal during recessions and more so for recessions caused by credit bubbles. This suggests we are only part-way down the road of seeing greater volatility and greater divergence in currency values globally.
Simon Smith, Chief Economist
Disclaimer: This material is considered as a marketing communication and does not contain and should not be construed as containing investment advice or an investment recommendation, or, an offer of or solicitation for any transactions in financial instruments. Past performance does not guarantee or predict future performance. FxPro does not take into account your personal investment objectives or financial situation and makes no representation, and assumes no liability to the accuracy or completeness of the information provided, nor for any loss arising from any investment based on a recommendation, forecast or other information supplied from any employee of FxPro, third party, or otherwise. This material has not been prepared in accordance with legal requirements promoting the independence of investment research, and it is not subject to any prohibition on dealing ahead of the dissemination of investment research. All expressions of opinion are subject to change without notice. Any opinions made may be personal to the author and may not reflect the opinions of FxPro. This communication must not be reproduced or further distributed without prior permission of FxPro.
Risk Warning: CFDs, which are leveraged products, incur a high level of risk and can result in the loss of all your invested capital. Therefore, CFDs may not be suitable for all investors. You should not risk more than you are prepared to lose. Before deciding to trade, please ensure you understand the risks involved and take into account your level of experience. Seek independent advice if necessary.
FxPro Financial Services Ltd is authorised and regulated by the CySEC (licence no. 078/07). FxPro Financial Services, Karyatidon 1, Ypsonas, Limassol 4180 Cyprus.
Get the 5 most predictable currency pairs