Alongside the euro, the other highly liquid reserve currencies JPY and CHF should be the main beneficiaries of a Fed-independence-led USD selloff. Given the depth of the dollar damage, we would expect EUR\/USD upside risks to extend to 1.25 even in the short term, while USD\/JPY could drop to 135.0. <\/p>\n
Looking at the broader market, a shock departure of Chair Powell would likely rattle the benign conditions which have supported FX carry trade strategies over the last couple of months. <\/p>\n
Aside from very popular carry trade strategies in the Turkish lira, we would expect other popular trades such as the Hungarian forint and broad swathes of Latin currencies (Brazil, Mexico and Colombia) to suffer sharp adjustments initially. Here, the spike in volatility would trigger the kind of value-at-risk de-leveraging that financial markets occasionally see.<\/p>\n
Not until longer-dated Treasury yields started to settle would we expect to see a return to EMFX. When the dust settles, this could see the Latin commodity-producing currencies favoured again \u2013 where commodities could be doing well both on growth prospects and the asset class being seen as an inflation hedge.<\/p>\n
On the subject of emerging markets, one of the most recent cautionary tales comes from Turkey. In March 2021, respected central bank Governor Naci Agbal was removed from office. In the immediate aftermath, the Turkish lira fell about 15%. But over the subsequent two years, when the policy rate was cut from 19.00% to 8.50% in the face of persistent inflation, the lira fell close to 60%. No one is saying US assets will suffer a similar fate, but the direction of travel would be clear, and there would be much discussion over the impact of negative real rates on the dollar.<\/p>\n","protected":false},"excerpt":{"rendered":"Alongside the euro, the other highly liquid reserve currencies JPY and CHF should be the main beneficiaries of…\n","protected":false},"author":2,"featured_media":2608,"comment_status":"","ping_status":"","sticky":false,"template":"","format":"standard","meta":{"footnotes":""},"categories":[37],"tags":[28,112],"class_list":{"0":"post-2607","1":"post","2":"type-post","3":"status-publish","4":"format-standard","5":"has-post-thumbnail","7":"category-markets","8":"tag-business","9":"tag-markets"},"_links":{"self":[{"href":"https:\/\/www.newsbeep.com\/us\/wp-json\/wp\/v2\/posts\/2607","targetHints":{"allow":["GET"]}}],"collection":[{"href":"https:\/\/www.newsbeep.com\/us\/wp-json\/wp\/v2\/posts"}],"about":[{"href":"https:\/\/www.newsbeep.com\/us\/wp-json\/wp\/v2\/types\/post"}],"author":[{"embeddable":true,"href":"https:\/\/www.newsbeep.com\/us\/wp-json\/wp\/v2\/users\/2"}],"replies":[{"embeddable":true,"href":"https:\/\/www.newsbeep.com\/us\/wp-json\/wp\/v2\/comments?post=2607"}],"version-history":[{"count":0,"href":"https:\/\/www.newsbeep.com\/us\/wp-json\/wp\/v2\/posts\/2607\/revisions"}],"wp:featuredmedia":[{"embeddable":true,"href":"https:\/\/www.newsbeep.com\/us\/wp-json\/wp\/v2\/media\/2608"}],"wp:attachment":[{"href":"https:\/\/www.newsbeep.com\/us\/wp-json\/wp\/v2\/media?parent=2607"}],"wp:term":[{"taxonomy":"category","embeddable":true,"href":"https:\/\/www.newsbeep.com\/us\/wp-json\/wp\/v2\/categories?post=2607"},{"taxonomy":"post_tag","embeddable":true,"href":"https:\/\/www.newsbeep.com\/us\/wp-json\/wp\/v2\/tags?post=2607"}],"curies":[{"name":"wp","href":"https:\/\/api.w.org\/{rel}","templated":true}]}}