In a world filled with plenty of uncertainties, the almost $7 trillion-a-day currency market is being seen as perhaps the best venue for trading the diverging policy paths of central banks worldwide in the pandemic’s delta era.
“The variant has created more unknowns and an environment that we are not used to,” said Hans Jacob Feder, global head of FX services at MUFG Investor Services based in London. “When and how we recover are some of the questions being asked, and there’s a lot of hypothesizing about what will happen next. How to interpret data before COVID-19 was easier. Now it’s not so clear, with people switching views faster. In FX, there’s probably going to be quite a bit of volatility.
“Central banks are all moving at a varying pace, but with more conviction about reversing policy,” said Mazen Issa, a senior currency strategist at TD Securities. “Emerging markets are further along in the policy-tightening cycle, and that’s lent itself to some EM currencies performing well. But Fed policy may be about to change, and those dynamics could become more fluid.”
Conversely, in the small but developed country of New Zealand, an unexpected delay of a widely expected rate hike last month — as the result of a pandemic-induced lockdown — caused a sudden drop in the kiwi NZDUSD, +0.59% before it recouped. Insight Investment moved into long positions on the Turkish lira TRYUSD, -0.54% and the Brazilian real in the middle of this year, and also likes the Peruvian sol and Colombian peso COPUSD, -0.13, according to Williams. All four currencies are “cheap” relative to long-term valuation metrics and exchange rates, and emerging-market currencies generally offer far more investment opportunities than advanced economies, like the U.S.
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