FX forecasts and associated rankings are published on behalf of Monex Europe and Monex Canada.
February was a volatile time for FX markets as gyrations in fixed income markets spilt over into broader market dynamics. For the most part, the month saw a continuation in mild USD weakness, with the DXY index falling 0.57% until the final day of the month. Then, a combination of month-end flows and a deterioration in the risk environment resulted in a bounce back in the dollar, with the DXY index closing the month out 0.33% higher. However, due to the composition of the DXY index, its trading pattern doesn’t explain the whole story. While the broad DXY index held firm on February 25th (the day before it took a leg higher as the dollar strengthened across the G10), much of the FX volatility was experienced then. On the Thursday, the yield on the US 10-year rose as high as 1.6%, before settling 14bps highs at 1.5199% at its close. The huge jump up in US back-end yields resulted in a bond market tantrum, which led to currencies like AUD and NOK falling over a percentage point, while even more pain was felt in the EM space. Traditional high-yielders like MXN and ZAR fell substantially in this environment (-2.35% and -3.65% respectively) and the pressure on EMFX even resulted in the BCB selling $1.535bn to shelter the Brazilian real.
Given this environment, our more conservative views on EM FX boded well, resulting in strong performances in USDBRL and USDZAR over the one-month horizon.
Meanwhile, the correction in the G10 space on the final day of the month saw our one-month rankings slip, however, our longer-term views remained accurate.
Our longer-dated forecasts, which outlined a sustained period of USD weakness, performed well in February, with the shorter-term forecasts falling short due to the rebound in the dollar at the end of the month.
Notable rankings come in USDSEK over the 6-month horizon, along with our 12-month EURUSD call.
Monex continues to rank well in USDJPY too, with our views on the currency pair now shifting to expect a higher USDJPY rate in the near-term – our March forecasts can be found here.
Monex’s conservative view on EMFX over February paid dividends when the DM bond tantrum resulted in the unwind of the recent EMFX rally. Corrections in notable pairs like USDMXN, USDBRL and USDZAR meant Monex placed well in the Reuters rankings over the 1-and-3-month horizons.
Looking ahead, our EMFX forecasts envisage mild EM strength throughout March, but with risks posed to the upside given the tentative nature of the risk environment amid higher DM yields.
EMERGING MARKETS RANKINGS
Author: Simon Harvey, Senior FX Market Analyst