Morning Commentary: Fixed Exchange Rates – the Return of Bretton Woods?
A daily summary and commentary of events and factors that affect the global markets, with a particular emphasis on the foreign exchange markets.
Fixed Exchange Rates – the Return of Bretton Woods?
Share this story:
Alan Rose Foreign Exchange Senior Trader
There is a spark of life in the markets today as improving economic data out of the U.K. and Germany have pushed European equities and interest rates higher with a positive ripple effect for the U.S. The better-than-expected data is a welcome change from the constant drumbeat of continuing concerns about the EZ being one of the major drags for the global economy. Commodity prices are continuing their resurgence and commodity-linked currencies are outperforming today.
But outside of today’s economic data sparking some foreign exchange movement, foreign exchange has been badly lagging behind the directionality, price movement and volatility of equities, interest rates, and commodities. With the exception of the GBP due to Brexit concerns, many of the other major currencies have been in the doldrums characterized by tight overnight ranges and trapped in broad consolidation patterns. Implied volatility, a metric to measure currency volatility, has dropped by 25% since the beginning of the year and is approaching lows not seen since 2014.
At times, it is almost characteristic of exchange rate movements under the Bretton Woods Agreement of 1945 where currencies were fixed against the U.S. dollar, saw only microscopic movements each day, and were locked into ultra-narrow ranges. That all came to an end when President Nixon took the U.S. dollar off the gold standard (1971) and currencies freely floated shortly thereafter with enormous volatility and directionality.
Some might say that a lack of volatility and directionality is good, as it is a sign the markets have reached an equilibrium point and have stabilized. But there is also the risk that when volatility gets this low, a catalyst of some sort can spark an outsized move where price action becomes exaggerated, erratic, and random, making it difficult to conclude transactions for both clients and traders alike. Tomorrow’s Fed announcement could provide a short term catalyst for the markets, but more than likely, we will continue to remain locked into the previous pattern of tight ranges and range bound foreign exchange rates.
HERE ARE THE KEY NEWS STORIES FROM OVERNIGHT:
The German ZEW business survey for March regarding business expectations came in better than expected. Expectations were for a print of -11.0, but instead, the survey came in at -3.6 after February’s -13.4.
Despite all the pessimistic articles about U.K. business planning being on hold or actually moving to other financial centers due to Brexit and the ever eternal negotiations,, the U.K. job market remains very strong. The UR rate fell from 4.0% to 3.9% (lowest level since the 1970s). In addition, wages and earnings also remained strong at 3.4% YoY. The British pound moved up sharply in response to the data but has given back much of its gains.
Want to learn more about international finance, economics, and global events? Sign up for our other Foreign Exchange emails and videos!
Follow City National Bank on social media:
Non-deposit investment products:
Are not FDIC insured,
Are not deposits or other obligations of City National Bank and are not guaranteed by City National Bank, and
Are subject to investment risks, including possible loss of the principal invested.
This report is for general information and education only and was compiled from data and sources believed to be reliable. City National Bank does not warrant that it is accurate or complete. Opinions expressed and estimates or projections given are those of the authors as of the date of the report with no obligation to update or notify of inaccuracy or change. This report is not a recommendation or an offer or solicitation to buy or sell any financial instrument discussed. It is not specific investment advice. Financial instruments discussed may not be suitable for the reader. Readers must make independent investment decisions based on their own investment objectives and financial situations. Prices and financial instruments discussed are subject to change without notice. Instruments denominated in a foreign currency are subject to exchange rate and other risks. City National Bank (and its clients or associated persons) may engage in transactions inconsistent with this report and may buy from or sell to clients or others the financial instruments discussed on a principal basis. Past performance is not an indication of future results. This report may not be reproduced, distributed or further published by any person without the written consent of City National Bank. Please cite source when quoting.
Here's what this indicator is saying about US stocks right now. ACTIVE INVESTOR WEEKLY EDITION: January 21, 2022 View in a browser FIDELITY VIEWPOINTS ® WEEKLY EDITION: January 21, 2022 Bollinger band stock signal Here's what this indicator is saying about US stocks right now. Read more CHART OF THE WEEK Inflation and corporate consolidation US industries have become
Learn how to keep all your accounts—not just the ones at Fidelity—secure. November 18, 2021 View in a browser FIDELITY VIEWPOINTS ® WEEKLY EDITION: November 18, 2021 What to do after a data breach Learn how to keep all your accounts—not just the ones at Fidelity—secure. Read more What's ahead for your RMDs Make sure to take your required withdrawals this year, then start to plan ahead.