Buyers dominated the US markets on Wednesday, which explains the surge in Asian markets on Thursday morning. Previously, we pointed out that the drawdown from the beginning of the week promises to be short-lived. It affected too narrow a spectrum of market assets.
Along with the rise of the markets, the pressure on the USD returned. However, this was not without the effect of the Bank of Canada. The Canadian dollar strengthened by 1.5% against the USD after the BoC decision to reduce the volume of weekly government bonds’ purchases (QE) by a quarter.
This symbolic decision shows that the G7 central banks are turning the page on coronavirus crisis measures. Developing countries have already seen a tightening of monetary policy since the start of the year, facing higher inflationary pressures.
Developed countries have more room to keep their policies soft than the likes of Russia, Ukraine or Turkey, whose currencies fell sharply last year.
The Fed is roughly in the middle of that spectrum, promising not to change policy for the foreseeable future. And, as we can see, these promises are enough for the dollar to give way to its major counterparts.
Europe is at the opposite end of the spectrum compared to EM markets. The European Central Bank will hold its next meeting today, and it risks triggering volatility in the euro. Economic and monetary processes have visibly synchronised since the global financial crisis. However, at pivotal moments for the global economy, the actions of central banks and governments are not in synch, which causes rapid capital flows.
Suppose at the end of today’s meeting, the European Central Bank improves its forecasts and clarifies that it is not ready to increase the overall volume of QE besides accelerating the printing press. In that case, it may trigger an immediate market reaction and support an upward trend of the single currency.
On the other hand, if the ECB pays more attention to risks and promises more support in the coming months, the single currency runs the risk of coming under prolonged and robust pressure, even against USD. But for now, it seems that there is a much higher chance for the ECB to have a more hawkish tone than six weeks ago.