Global race to tapering ignites hunt for next currency winners

9 May, 2021 12:00 AM printer

LONDON: Global central banks are starting to wind down the trillion-dollar money printing machines set in motion to rescue their economies in 2020. Getting ahead of them is becoming this year’s biggest currency trade.

Early changes to bond-buying programs from Canada and Britain have been rewarding for foreign-exchange players. Meanwhile, Norway, which hasn’t needed to deploy more unconventional policy such as asset purchases, is already talking about raising rates. The trio’s currencies are leading the Group of 10 this year, posting gains of more than 4%, report agencies.

Canadian dollar and Norwegian krone are early beneficiaries of policy wave

Yet that acceleration may already be losing momentum now that those policy makers have shown their hands. That has left traders on a mission to identify economies that are heating up too fast for comfort—and those where tightening is a far-flung prospect—in order to pick the next winners and losers.

One strategy is to follow the commodity boom and bet on exporters such as Australia and New Zealand, where growth is roaring back. Another playbook involves buying the currency of a country likely to hike rates, while selling that of a country committed to ultra-low rates.

“Some central banks outside the Fed like the Reserve Bank of Australia and the Reserve Bank of New Zealand may find themselves in a position similar to the Bank of Canada, where they could be tightening much sooner than what they’ve initially indicated,” said Mazen Issa, senior FX strategist at TD Securities. Canada’s move “may give a little bit more confidence to the policy community to begin making little tweaks to their own policy outlooks as well,” he added.

The Federal Reserve, often called the central bank of the world, is taking a softly-softly approach toward policy normalization designed to avoid market chaos reminiscent of 2013’s taper tantrum. Ditto the European Central Bank, whose chief Christine Lagarde recently said talk of tapering is “premature.” But waiting as growth roars back runs the risk of falling so far out of step with economic reality as to provoke a policy overshoot.

“The challenge for the Fed is that it should not wait too long because they may have to move faster, and that may shock the market,” said Athanasios Vamvakidis, head of G-10 FX strategy at Bank of America Corp. “It all depends on data.”

The latest data may justify the Fed’s steady hand: April’s disappointing jobs report Friday recast inflation and rate-hike expectations.