If one of the central banks raises rates, then the attractiveness of local assets increases and the inflow of capital contributes to the strengthening of the national currency. Let’s discuss how you can take advantage of this and make up a trading plan for USDJPY, USDCHF, USDTRY, GBPCHF, GBPJPY, EURCAD, EURMXN, and EURRUB
Quarterly currencies fundamental forecast
There are always leaders and outsiders in any market. The most serious movements occur when a clearly lagging currency turns into a favorite. This happened with the US dollar after the Fed officials stopped being calm and started talking about withdrawing monetary stimulus. At the same time, stable Forex trends are formed if one of the issuing central banks intends to tighten monetary policy, while the other, on the contrary, weakens it. However, the recent example of the Fed shows that at any moment everything can turn upside down.
Despite the fact that most of the world’s central banks continue to adhere to the opinion that inflation acceleration is temporary, some regulators prefer not to waste time, but raise rates in order to combat the CPI growth. Brazil, Mexico, Turkey, Czech Republic, and Russia are in favor of monetary restriction, China restricts lending, and the UK, the USA, and Canada are talking about tapering QE programs or preparing for them. Most likely, one should look for a favorite on which to bet among the currencies of the above countries.
Monetary policy of central banks
The opposite situation is in the Eurozone, Japan, and Switzerland. Despite the proximity of inflation to the ECB’s 2% target, Christine Lagarde and her colleagues predict that in 2022 the underlying effects will disappear and consumer prices will begin to slow down. In such circumstances, the question arises, how to replace the emergency asset purchase program for €1.85 trillion expiring in March next year? The SNB does not hide its desire to remain in the shadow of the European Central Bank. Bern is ready to let Frankfurt go ahead in the process of monetary policy normalization, which makes the franc’s position vulnerable.
Bank of Japan officials do not rule out the possibility that deflation may return. They are not going to abandon the policy of targeting 10-year bond yields, at least until the Fed starts raising the federal funds rate. This circumstance holds back the yen and makes it one of the main outsiders in Forex not only in 2021 but also in 2022.
A curious situation is emerging in Turkey, where President Recep Erdogan is using his political influence to force the central bank to loosen monetary policy despite rising inflation by more than 16%. Dissenting leaders lose their seats. Two resignations have already taken place, and if the new head of the central bank follows the lead of the president, this will worsen the lira’s position.
In Russia, following a 125 bps hike in the key rate since March, Elvira Nabiullina warned that it could increase by another 25-100 bps in July. In Mexico, after an unexpected monetary tightening, markets began to anticipate another rate hike in 2021.
Thus, based on divergence in monetary policy, one should pay attention to USDJPY, USDCHF, USDTRY, GBPCHF, and GBPJPY purchases with targets at 113, 0.94, 9, 1.303, and 157.5, as well as to EURCAD, EURMXN, and EURRUB sales with targets at 1.44, 22.8, and 85.
Price chart of USDJPY in real time mode
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