Morning Commentary: “Failing to Plan, is Planning to Fail”

Foreign Exchange - Morning Commentary

“Failing to Plan, is Planning to Fail”

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Alan Rose
Alan Rose
Foreign Exchange Senior Trader
Markets are extremely quiet with many key financial centers closed due to the Good Friday holiday. There is a bit of economic data that has come out overnight that has caused a tiny ripple in the markets (see below).
We have been regularly reminding our clients and readers that volatility regarding foreign exchange rates is at historic lows. This phenomenon has been difficult to explain given the sharp shift in market sentiment from late last year, where markets were concerned about a potential global recession, to the more upbeat and optimistic shift in sentiment starting in January sparked by the Fed’s dovish pivot.
Other asset classes (equities, interest rates, and commodities) have experienced sharp pivots and trend-like movements, but foreign exchange rates (DXY index) have been largely consolidative and trading in narrow ranges since November. There are too many days to count where overnight trading ranges for many major currencies have been painfully tight and uninspiring despite movements in other asset classes.
Based on history, this will not last. Over the past 25 years, there have been four previous episodes where the JP Morgan FX volatility index has reached near current historic low levels of volatility. In three of the past four troughs, there have been outsized moves of between 10% and 15% for the DXY index over the course of six to nine months; sometimes the moves have been bullish for the DXY and sometimes they have been bearish. We tend to favor a weaker DXY down the road.
Today’s message is a reminder that both importers and exporters need to be proactive about their orders and manage them from the viewpoint that the lack of movement and direction that we have been recently witnessing will not last much longer.
  • Japan reported March national CPI overnight. Headline inflation picked up to 0.5% YoY from 0.2% in February. Inflation has continued to remain exasperatingly low despite all of the Bank of Japan’s extraordinary monetary efforts to raise it to nearly 2.0% YoY.
  • U.S. Housing Starts for March came in below expectations to the weakest point since May 2017. Residential starts fell 0.3% to 1,139,000 after February’s report was revised lower. Housing permits, a proxy for future construction, also slumped by 1.7%. Single-family starts fell by 0.4% with multi-family starts being unchanged.
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