Global Currencies: Playing the Waiting Game

March 26, 2024

Global currency markets are influenced by a slew of factors that include local economic indicators and policies ushered in from time to time, geopolitical events playing out, and overall market sentiment around the US dollar. Given that the dollar is the world’s primary reserve currency and is involved in most global transactions, the recent upheavals around the US inflation rates, its impact on interest rates, and the subsequent softening of the dollar have impacted both the bullion and commodity markets.

Given that the global economy and exchange rates are closely linked with currency valuation often shaping the contours of international trade and investment inflows, recent rate fluctuations have impacted the competitiveness and profitability of enterprises and the purchasing power of consumers. In its report, the IMF revised its global growth projections indicating improvements in both the US and China over the easing of inflation rates and the increased probability of rate cuts by the US Fed. The IMF estimates the world economy to grow 3.1% in 2024, which represents a marginally spike from its earlier forecast in October.

A recent survey report1 listing out the top 15 currencies worldwide had pegged the Australian Dollar (AUD) and the Canadian Dollar (CAD) at the thirteenth and twelfth slots respectively. The report noted that with 6.8% daily transactions the AUD is benefiting from currency stability, elevated interest rates, and its diversification advantages.

Australian dollar

In recent times, the AUD faced some pressure2 as the dollar saw renewed buying pressure following the US Fed’s decision to keep the rates unchanged for a fifth time. This signal around an imminent rate cut within the next 3-4 months is likely to keep the USD-AUD pair’s key driver for now, the persistent weakness in copper and iron-ore prices could be another factor worth keeping in mind while assessing this currency comparison. Additionally, the potential growth of the Chinese economy post a range of stimuli offered by their government also has a bearing on the AUD’s strengthening. With unemployment rates ticking lower during February and the Australian central bank adopting a dovish stance on rates, there is some chance of the AUD gathering momentum later in 2024. Currency analysts believe that if this pair surpasses the 0.6871 peak of December last, it could target a 0.70 mark in the near term.

Canadian dollar

The CAD, as with the other top currencies, got a much-needed boost after the Fed meeting left the rates unchanged and also kept their rate projections at the same levels as last December. The USD-CAD plunged from 1.3606 to an overnight low of 1.3456 amidst fresh reports that the Bank of Canada could cut its overnight rate by 25 basis points as early as June, which could then limit the downside. According to the latest economic indicators (March 2024), there is an uptick in the manufacturing sector with the S&P Index reporting a seasonally adjusted increase from 48.3 in January to 49.7, its highest level since last April. This indicates potential improvements in the country’s manufacturing sector that could have broader economic implications. Some of the key factors driving the CAD include low rates and oscillating oil prices, the second named being a major factor contributing to Canada’s balance of payments as an exporter. In the past, a spike in oil prices has resulted in a stronger CAD.

Latin America

Meanwhile, Latin American currencies broadly fell amidst a firming up of the dollar over the Fed’s decision to keep interest rates up for a bit longer. Higher commodity prices over upbeat data from top consumer China also contributed to lifting up the stock markets in the region.  The MSCI Index that tracks currencies from this region dipped 0.6% with analysts suggesting that the US Fed needs to reinforce the need for higher confidence in price stabilization before starting a cycle of rate cuts. Such a move would reduce investors’ risk appetite and bolster the dollar against the LatAm currencies.

Data from Brazil indicated that economic activity is now growing above expectations amidst a boost to the retail and services sectors. The Brazilian Real was steady at around 4.97 to the USD through March as investors continued to wait for the Fed rate cuts as well as Brazil’s reactions to it. The Central Bank reduced the Selic rate by another 50 bps to 10.75% while highlighting the importance of fiscal targets to stabilize inflation expectations. It also paved the way for another 50 bps cut in May though the upside risks to inflation and fiscal spending may actually slow down the BCB to slow down the pace of rate cuts after June. The country’s economic indicators suggest inflation to be around the 3.5% mark in 2024 and dropping to 3.2% in 2025.

Last week, the Chilean peso dropped 2% against the dollar amidst reports that its economy was poised to shrug off last year’s economic stagnation and rebound in 2024 and 2025. OECD estimates predict that the outlook will improve due to a rise in real wages resulting from a drop in inflation and falling interest rates. Production is set to grow by about 2.5% in 2025 on the backs of a spike in consumption. Demand for minerals has shown signs of growth, a factor that will help Chile on the export front. The price of copper is the key to Chile’s balance of payments as the country relies heavily on its exports. Global copper prices, therefore, could be a key factor in determining Chile’s economic growth, investment decisions, and stability.