Several currencies have sparked a resurgence in Forex trading activity in recent weeks. These include the Chinese yuan (CNY), the Russian ruble (RUB), and the Euro (EUR). Forex volumes rose sharply in Q1 2018 as interest in these and other currency pairs increased. While volatility is at all-time lows for most currency pairs in the Forex market, these three have been particularly susceptible to increased trading activity. This was confirmed in a statement released by Bank of America Merrill Lynch. 2017 was a lackluster year for Forex trading activity, particularly in light of dollar weakness and uncertainty relating to the Trump administration’s economic agenda.
Geopolitical Concerns Drive Markets
Several factors are coalescing to shape the global economic climate, notably brewing tensions between Iran and the US, and Iran and Israel. Global tensions are being calmed to a degree by the successes enjoyed by the US administration vis-à-vis the release of 3 US citizens held hostage by North Korea. Of course, on an economic front there are many reasons why uncertainty remains in place.
There is talk of a renegotiation of NAFTA between Canada, the US and Mexico, and the ongoing snafu about the border wall between the US and Mexico continues to be a thorn in the Trump administration’s side. We are seeing a move towards higher inflation across the board. This is particularly true in the US where the forecast by the CME Group FedWatch tool shows a 100% likelihood of rates rising on 13 June 2018. If this happens, the interest rate will be 1.75% – 2.00%. While low by historical standards, it is part of a much broader trend of rising interest rates. The Fed FOMC has been increasing interest rates since December 2015 and shows no signs of altering course on this policy.
Interest Rate Expectations in the Performance of the Economy
There are far-reaching implications for this on Forex trading and the broader financial markets. For example, when the Fed FOMC raises rates, the Dow Jones, NASDAQ, and S&P 500 react accordingly. Rate hikes indicate that the cost of capital is rising, and this does not bode well for stocks. Investors tend to shy away from stocks since the increased costs of operations will likely impact on the bottom line when higher prices are passed on to consumers. Inflation data also plays a key part in the performance of currencies.
According to Wilkins Finance currency expert, Carlos Vigil: ‘When inflation forecasts do not move as expected, currencies react accordingly. The dollar recently retreated against a basket of currencies after it was revealed that lacklustre US inflation data is a reality in the US economy. With annual inflation increasing by just 2.5% during the month of April, monthly inflation was up just 0.2%. We can expect at least 2 more rate hikes in 2018, but there is clearly no hurry to boost rates anytime soon.’
Nonetheless, the apparent hibernation in Forex trading during 2017 is no longer. This year, we still see many Forex majors trading in narrow ranges, despite increased volatility among asset classes. During Q1 2018, there was a 17% spike in EUR trading, 20% spike in RUB trading, and a 54% spike in CNY trading. Several other currencies also witnessed higher trading volumes, notably the NZD, the TBH, and the AUD. Many investors and traders are expecting the USD to weaken in 2018, and there are also fears about cheap money drying up as the Fed raises rates all ove