The US dollar began the month on a strong note, but as events unfolded, this quickly turned into a rout, notably in favour of the emerging market currencies.
On a macro level, the first major sign of trouble for the dollar emerged on March 10 on the occasion of the ECB monetary policy meeting. The headline was unsurprising, as the deposit rate moved to -0.4%, further into negative territory. It was however a comment from Draghi who saw no need for further cuts that set fire to the Euro, which posted a key reversal day – making a new low and then closing above its prior close.
A week later, the FED FOMC meeting yielded no rate hike, but offered a downgraded view of GDP and consequently this was viewed as a dovish assessment. Finally, Fed chair Yellen made remarks on the 29th urging a cautious outlook. The forecasts of 4 Fed rate hikes in 2016 seem like a distant memory now. EURUSD ended March with a 4.5% gain.
Also noteworthy was the progress of Donald Trump as the outspoken nominee for the US Republican party. A development that finds no favour with overseas investors and governments. Currently the Trump phenomenon appears to be losing steam after a series of gaffes. It would appear that Ms. Clinton will be extremely hard to beat after such a divisive Republican campaign to date.
The really significant move occurred as emerging market pairs underwent a sharp reversal with investors focusing again on yield. Brazil was the clear winner, moving 11% higher vs. USD. The rationale being that the Rousseff government is on its last scandal-ridden legs and a new government could introduce fresh economic stimuli. Many traders have been shorting Brazil as a result of the recent turmoil, but were taken by surprise by the extent of the buying interest.
This short squeeze was evident in other EM pairs as commodity prices recovered, adding to the attraction of higher yields. The Rouble gained 11%, the Rand 7.5%, while other LATAM pairs, notably Colombia (10%) also benefited.
Among the G10 commodity currencies, AUD led with a 7.5% gain, followed by NZD with a gain of 5% (despite a 25bp rate cut from RBNZ) and Canada rose 4%. NB. Crude Oil rose 13% in March.
Concerns over China have abated; the currency was flat in March and the SSE index advanced 10%.
In conclusion: Investors are extremely wary of G3 monetary policies that have created a surreal world of negative interest rates whose long-term effects cannot yet be measured. Additionally, The USA is marking time pending the outcome of the election. Whereas recent fund flows have favoured the Euro, other events do not, such as the increasing amount of terrorist activity, the potential British exit from the EU and growing alarm over the open border policy which is overwhelming the social services sector in many EU countries.
The Japanese Yen, which had a huge upside move in February, remained flat in March.
This is a very difficult time to assess global markets from a fundamental perspective.
We continue to believe that investing in the FX markets through a well-diversified group of experienced managers remains the best way to generate stable positive returns.