Main Foreign Exchange Market Drivers

Main, Foreign, Exchange, Market, Drivers, Fundamental Analysis, fx trader, forex

25 Jul 2016

The US dollar gained against all the major currencies over the past week.  It also rose against many emerging market currencies. A notable exception was the Chinese yuan. The yuan rose before the weekend, extended its advancing streak to four consecutive sessions, and in so doing, it snapped a six-week slide.

Last week's advance was only the second week since the start of May that the yuan moved higher. The optimists claim the firmer yuan, and official comments suggesting capital outflows have eased, show that China does not seek a continued depreciation of the yuan. The cynics warn that by allowing the yuan to rise ahead of the G20 finance ministers' meeting will deflect criticism about its foreign exchange policy, and that the decline will likely continue afterwards.

It is tempting to construct a narrative for the dollar's gains based on the string of stronger than expected US economic data. However, the US economic calendar has been light in recent days, and the interest rate channel is quiet. The implied yield of the September Fed funds futures increased by a single basis point. The yield on the two-year Treasury note increased two basis points, while the yield on the 10-year was up less than a basis point.

The main drivers in the foreign exchange market can largely be found in developments outside the US. Rate cut expectations in Australia and New Zealand, for example, weighed on their respective currencies. Speculation of "helicopter money" in Japan undermined the yen, until many participants accepted that BOJ Governor Kuroda's June comments noting the BOJ purchases of bonds directly from the government is banned. Sterling was taken down by signs that despite the residual strength before the referendum, there has been a significant hit in sentiment, picked up in the flash PMIs. Draghi said little new at the press conference following the ECB meeting, which left the euro stuck around the $1.10-level.