Delta caused a small storm in the markets

Schedule dollar to pound at intervals of 60 minutes

Safe currencies like the yen and the dollar traded near multi-month highs against the riskier Australian dollar and British pound on Tuesday, as fears grow that a ruthless variant of the coronavirus could reverse the global recovery.

Cryptocurrencies also fell, with Bitcoin dropping below $ 30,000 for the first time in about a month.

The yen traded at 80.09 per Australian dollar, close to a more than five-month high of 80.05 hit on Monday. It stood at 149.48 per pound, approaching the nearly three-month high of 149.35 reached earlier.

The dollar touched a nearly eight-month high of $ 0.7317 per Aussie on Tuesday before trading at $ 0.7319 and changed hands at $ 1.36625 a pound after hitting a high of $ 1.3655 since early February. previous session.

The Australian dollar accelerated its decline as the minutes of the Reserve Bank of Australia meeting this month was seen by some economists as a sign that the central bank may reverse its stimulus cut.

The yen edged ahead of the dollar, climbing to 109.07 per dollar on Monday for the first time since late May, helped by a sharp decline in US Treasury yields to 1.1740% for the first time since mid-February. On Tuesday, the dollar was given 109.46 yens.

The rapidly spreading delta variant of the coronavirus is currently the dominant strain worldwide and has been accompanied by a spike in infections in the United States, especially in regions where vaccinations have slowed down.

Meanwhile, Boris Johnson’s “Freedom Day”, which ended more than a year of COVID-19 quarantine restrictions in England, was marred by rising infections and the forced self-isolation of the British prime minister after Health Minister Sajid Javid tested positive for the virus.

In Australia, almost half of the 25 million people live in quarantine to suppress the Delta variant outbreak.


“What is probably about the markets right now is … a surge in infections occurring in developed markets with high vaccination rates,” National Australia Bank analyst Tapas Strickland wrote in a note to clients.

“This suggests that it may be necessary to extend the quarantine restrictions against the spread of the virus for a longer time”, which is delaying the recovery of the global economy, – he said.


The euro fell 0.1% to $ 1.17885 after falling yesterday to its lowest level since early April at $ 1.1764.

The European Central Bank announces the policy on Thursday, and market participants are intrigued to see the monetary authority implement changes in its strategy, unveiled earlier this month.


“The ECB is expected to solidify its dovish policy setting at this week’s meeting,” paving the way for further easing in the euro in the coming months, Rabobank strategist Jane Foley wrote in a research note.


At the same time, the dollar is likely to maintain support from demand for defensive assets, pushing the euro towards $ 1.17 by the end of the year, she said.

In terms of cryptocurrencies, Bitcoin fell to $ 29,500, a level not seen since June 22, before stabilizing with a 4.1% loss to $ 29,559.10. The price of ether, its competitor, fell 4.8% to $ 1,730.33, also close to a monthly low.

EUR/USD moving towards 1.1715 and 1.1665

The United States economy began its recovery in June 2009, that is, 128 months ago.

For the entire period of growth, the recession lasted only 2 months and ended in April 2020. Nevertheless, investors fear that the beginning phase of strengthening may be short-lived, and the peak of the recovery is already in the past.

Investors’ fears led to the most serious fall in the S&P 500 in two months, which, through the correlation of currencies, supported the decline in EUR / USD.

Dynamics of US GDP

Fears that better times are left behind amid the spread of a new strain of COVID-19 are forcing investors to ditch risky assets in favor of defensive instruments, such as debt bonds.

The Wall Street Journal believes that the peak of growth of the American economy fell in the second quarter (+ 9.1%), further the indicator will decline from 6.9% in 2021 to 3.2% in 2022 and 2.3% in 2023.

Logically, risk aversion should support the strengthening of the dollar. In fact, the slowdown in the US economy, coupled with the Fed’s decision to normalize monetary policy earlier than planned, leads to the fact that carry traders dump risky assets and return capital to funding currencies – the euro and the yen. This process is reflected by the decline in the EM MSCI stock index.

Dynamics of the world index of stocks of developing countries
Dynamics of the world index of stocks of developing countries

The European currency is supported by the increased forecast of the German economy from the Bundesbank, where it is believed that in the third quarter GDP will reach the pre-pandemic level. True, the Central Bank at that time did not take into account the risks of the spread of the new strain. At the same time, the growing inflation in the Eurozone may strengthen the position of the “hawks” in the ECB Council.

However, it seems that Christine Lagarde was able to reach an understanding with the hardliners. The Hawks adopted a 2% symmetric inflation formula, which neutralized the risks of a split at the upcoming meeting of the regulator. This is, of course, negative news for the European currency.

I believe that German macroeconomic reporting will only be able to provide EUR / USD with short-term support. The bears successfully stormed the support at 1.1770, and the pair went to 1.1715 and 1.1665.

The dollar rises and makes investors nervous


Investors in emerging markets are always watching the Fed’s actions closely. And now the American Central Bank is making them nervous. Federal Reserve Chairman Jay Powell says the US central bank considers the recent surge in consumer price inflation to be temporary and will not risk and undermine the economic recovery by premature monetary tightening.

However, conflicting signals are coming in. Tough-minded officials from the Federal Open Market Committee have suggested that the Fed cut support for the economy through asset purchases in September and raise interest rates next year.

This is a game changer for investors in emerging markets.


“The Fed moved very quickly from speculating about inflation to raising rates,” said Phoenix Cullen, emerging markets strategist at Societe Generale in London. “The restructuring of the market will take several months, which will be very difficult … Until the first advance occurs, the dollar will rise much higher.”


A strengthening dollar poses problems for fund managers investing in local currency stocks or bonds in emerging markets as it eats up the dollar value of those rates.

Throughout most of the pandemic, the dollar has been falling against the currencies of major U.S. trading partners. But the picture changed after a recovery began late last year. Following sharp fluctuations from January to May, the underlying DXY dollar index is up more than 3% this year.

At the same time, growth in EM stocks stalled. They started the year with a strong start, but the underlying MSCI EM index is now more than 7% below its peak in mid-February.

Further – worse

There are fears that things will get worse. If the Fed raises interest rates to combat inflation, it will not only strengthen the dollar, but also increase the attractiveness of “safe” assets such as US government bonds, as a result, investors will be less interested in looking for more profitable and risky assets in other regions. Accordingly, even EM assets denominated in dollars or other foreign currencies, for example, sovereign and corporate Eurobonds, suffer.

Investors’ troubles are also exacerbated by the fact that the recovery of the Chinese economy begins to lose momentum. As the world’s second largest economy after the United States, which has driven emerging economies for many years thanks to the huge demand for their commodities and other export products, China has the same impact on EM asset dynamics as the United States, some analysts would say that is even more.


“This undoubtedly raises a lot of concerns about the timing of the recovery in global growth amid a slowdown in China,” Kalen said.


One of the indicators of the prospects for the development of the world economy can be traced in the commodity markets. Prices have risen strongly over the past year, with oil recently surging above pre-coronavirus levels and copper hitting an all-time high. But now they are losing ground.

Simon Quihano-Evans, an economist at Gemcorp Capital and an emerging markets analyst, believes oil has already peaked and food prices will peak over the next few months.

In his opinion, the rise in commodity prices and inflation in consumer prices are temporary phenomena that investors in EM markets are already used to, but which most investors in developed markets have never encountered before.


“There has never been any reflation for me,” he said. “It’s more of a one-off shock and was stronger for developed market participants than for EM market participants.”


The optimism about the American economy, he said, is largely due to the introduction of vaccines, which has slowed recently, just as the delta strain and other strains have become a serious problem in the United States and around the world. This affects the yield on US Treasuries, which rose in the first quarter of this year when investors were selling safe-haven assets, but then fell.

Under pressure

Meanwhile, “the Fed continues to actively buy bonds. Although the Fed’s policy has not changed, whenever such problems arise, there will be downward pressure on yields. ”

Investors will have to exercise caution when investing in local currency assets in emerging markets in the second half of this year, he said. There will be more one-off shocks related to inflation and other factors, amid the upcoming changes in the Fed’s policy.

However, Murat Ulgen, head of emerging markets research at HSBC, believes investors may be wrong to obsess over the Fed.

He argues that this time around, many emerging economies are much better equipped to withstand disruptions from the Fed’s stimulus removal than during the 2013-14 panic, when the prospect of cut support hit EM assets hard. At that time, fundamentals such as central bank reserves and external balance sheets were much worse off than they are today.

In 2013, policymakers in developing countries were surprised by the Fed’s announcement of an imminent policy change. This time, many of them have already begun to tighten the policy themselves. Last week, Chile’s central bank was the latest among emerging market central banks to raise interest rates amid inflation.


“This time, EM markets are trying to outpace the Fed,” Ulgen said. “The degree of possible tightening of policy, accounted for in the local debt of EM-markets, corresponds to the level of 2018, when the Fed not only began to raise rates, but also did it faster than predicted.”