Greek debt and UK inflation concerns help the US dollar regain momentum

May has been quite an eventful month for the foreign currency markets with the major currencies jockeying for position amidst a flurry of expected and unexpected announcements.

From the surprisingly clear outcome of the UK general election, to the positive EU data getting muddled with concerns over the Greek debt, the inconsistency of US data, and the tumbling fate of the Japanese Yen, May really kept investors on their toes, affording both the bears and the bulls moments of excitement and action.

With the exception of a couple of spikes and a few sharp but quick dips, the Chinese renminbi (CNY) managed to remain relatively stable against the US dollar throughout May. In its ongoing efforts to reinvigorate economic momentum, the People’s Bank of China (PBoC) announced its third interest-rate cut in six months on 10th May, which caused the first spike in the USDCNY pair. Much of the economic data released by China this month missed expectations and showed signs that the economy is growing at a slower pace than the seven percent target set by Premier Li Keqiang for 2015.

In line with expectations, the USDCNY continues to trade between the 6.19 and 6.22 range, as has been the case over the past three months. The Chinese economy is continuing to show that it is experiencing downside pressures, but these have already largely been priced into the CNY and the PBoC has continued to react to the negative data. I am expecting the PBoC to act aggressively when it comes to defending the seven percent GDP target, and there is still far more leverage for the central bank to continue easing policy.

The Indian rupee (INR) fell against most major currencies in May. The Reserve Bank of India did not intervene in this recent slide of the currency, as it had done in the past by leveraging its record-high foreign reserves. On 7th May the INR hit a 20-month low of 64 rupees per US dollar, and hit that level again on the 12th and 27th of the month. Overall, the rupee has lost about 10 percent of its value over the last 12 months. With all of India’s major partners (except the US) following aggressive monetary policies, demand for India’s exports has drastically slowed. Moreover, when the US Federal Reserve finally announces its anticipated interest-rate hike, foreign investors are expected to pull their capital out of emerging markets, which will push the rupee even lower.

Nevertheless, the high reserves of the RBI afford it a unique position of being able to absorb much of the expected volatility, thereby helping the INR to bounce back quickly.

Although the rupee has continued to slide, the Indian economy is performing well and there is optimism that its GDP growth could surpass China’s this year. The main concern affecting the rupee is the capital outflow, therefore I do not believe that further interest rate cuts are needed yet because the country’s economic data has been strong, and lower interest rates would more likely than not encourage investors to move their capital elsewhere. With the RBI having high reserves at their disposal and economic data performing robustly, the central bank can be patient when it comes to policy moves.

The Indonesian rupiah (IDR) found it hard to keep its exchange rate below 13,000 against the US dollar in May. Around the middle of March 2015, the USDIDR pair broke above 13,000—a level it hadn’t previously reached since 1998—and after hitting that level again a couple of times in April, it then spent most of May exchanging well above it. Any strength the rupiah managed to gain in May has been short-lived on account of the greenback currently being so attractive in the global markets. Like other emerging-market currencies, the rupiah will continue to be susceptible to the actions and announcements of the US Fed, especially in the event of an interest-rate hike later this year.

The news that Indonesian economic growth shrank below the 5% expectation at 4.7 per cent for Q1 2015 really hurt the currency throughout the month of May. Losses were further accelerated when US Federal Reserve Chair Janet Yellen repeated later in the month that the central bank still intends to begin raising interest rates at some point this year. This will pressure the rupiah in itself, but the news of the GDP coming in below expectations will be what is hurting investor sentiment, and will likely lead to further lows for the rupiah down the road.

After some gains against the US dollar in the first half of May, the Malaysian ringgit (MYR) caved under the greenback’s pressure in the latter half of month. Malaysia’s higher-than-expected first quarter GDP growth pushed the USDMYR exchanged rate to 3.5622 on 15th May, down from 3.6241 where it had peaked on 12th May. Nevertheless, with the USD gaining momentum in the latter half of the month as European investors began worrying about the Greek debt once more, the MYR began depreciating along with most other emerging market currencies as global markets began favouring the US dollar once again.

The Malaysian ringgit had a really volatile month, with the currency gaining from the validation in expectations that the economy is not as reliant on crude exports as was previously being priced into the currency, and with traders beginning to get impatient with a lack of clarity from the Federal Reserve on the timing of interest rate hikes. Unfortunately these gains were later reversed when Janet Yellen repeated the Federal Reserve’s intention to begin raising interest rates at some point this year, which calmed emerging anxiety that there could be a swerve in direction from the Federal Reserve. Further declines in the price of WTI at the end of the month really hurt commodity linked currencies, with the Malaysian ringgit being one of many to fall sharply at the end of the month.

The UAE dirham (AED), which is pegged to the US dollar, mirrored the movements of the USD against other currencies. After a slow start to the month, the currency showed some wavering as positive EU data and a clear Conservative victory in the UK general elections strengthened both the euro and the GBP against both the greenback and the AED. The second half of the month, however, was all about a USD (and AED) rally since concerns over the Greek debt began overshadowing all other European news. Although the US Fed is not likely to increase interest rates in June, it is still likely to implement a raise later this year, which is expected to strengthen the dirham even more.

The UAE dirham performed in line with my expectations throughout May. I noted in April that the currency would be vulnerable to short-term declines, mainly because it was inevitable that traders would get impatient with the USD due to the Federal Reserve being in no hurry whatsoever to begin raising US interest rates. This was always going to be a short term move, mainly because the USD uptrend in itself will always be supported as long as optimism remains that the Federal Reserve will still begin raising interest rates during 2015. Janet Yellen repeated that this is still the intention of the Fed at the end of the month, which upgraded the prospects for the dirham in the mid-term.

Unlike what has been happening in other markets, the month of May has been extremely stable for the Nigerian naira (NGN), which traded for the most part around the level of 199 to the US dollar. Following the election of the new president Muhammadu Buhari on 1st April, who replaced Goodluck Jonathan, the USDNGN exchange rate has remained fairly stable due to the continued intervention of the Central Bank of Nigeria. The policy direction of the new government is believed to be shaping the short-term exchange rate of the Nigerian currency and trading should resume to a more normalized state soon.

One of the major reasons why the Naira performed so consistently throughout May was because the currency had weakened to such a dramatic extent at the beginning of the year as investors were alarmed by the upcoming election and a tumble in the price of oil. Unless the USD rallies to new highs, or the price of WTI reaches new milestone lows, the Naira is likely to remain stable for at least the beginning of the next month as well.

The EURUSD began the month rather quietly with the US dollar showing signs of recovering momentum after the pressure it had received during the last week of April in anticipation of the FOMC statement. However, the uncertainty over the UK general election increased buying of the EURGBP pair, which also raised the value of the EURUSD to 1.1370 by 7th May. With the UK general election over, a positive NFP report from the US and increased fears over the failed European talks regarding Greece’s debt reversed the direction of the pair for the rest of the week pushing the euro down against the greenback. The following week brought positive European data (barring Greece) that began favouring the euro, while a statement by Bill Dudley (Federal Reserve New York Chief) that he was unsure when the Federal Reserve would hike interest rates helped to further strengthen the building momentum for the euro.

After hitting its monthly high of 1.1446 on 15th May and flat-lining for a few days in the 1.14 region, the EURUSD began to sharply decline in the second half of the month, experiencing a steep fall on the 19th on account of the news that Greece had used emergency reserves to pay the IMF. When Greece warned on the 22nd of the month that it would be unable to meet its next debt payment at the end of May, the EURUSD pair tumbled even more, falling below 1.10 and remaining there through the end of the month.

After hitting a deep low against the US dollar in April, the British pound fared surprisingly well throughout May. Despite a slow start, the GBPUSD began charging upwards on 7th May when the results of the UK general election proved to be nowhere as close as polls had shown. With the Conservatives winning a majority and the possibility of a hung parliament eliminated, investors turned to the pound with replenished confidence. After the announcement regarding US interest rates by Fed’s Bill Dudley on the 12th of the month dampened expectations that the Federal Reserve would be raising interest rates in the near future, and in combination with news of Greece’s relapse into recession on 13th May, the GBP rallied even higher against its major competitors around the middle of May.

Despite the dovish views of Bank of England (BoE) Governor Mark Carney regarding inflation—which somewhat slowed down the pound’s rally—the GBPUSD pair rose to its monthly high of 1.5803 on 14th May. Nevertheless, the news on 19th May that UK inflation had turned negative (-0.1 per cent) for the first time in April erased any gains the pound had made in the previous week. On 21st May, however, UK retail sales were announced much higher than anticipated, and the GBP rallied once more against its major competitors. Continuing concerns over UK inflation levels and a leaked email revealing that that the BoE is investigating potential risks to the country’s economy should the UK leave the EU, weighed heavily on investor sentiment and sent the GBPUSD pair down below the 1.54 level, where it stayed for the rest of the month.

With all the contradicting news coming out of both the US and Europe throughout the first half of May, the Japanese yen managed to retain relative stability against the US dollar with the USDJPY pair fluctuating somewhat between the 118.5 and 120.0 levels. After positive data from the US, and negative news from the EU and the UK towards the end of the month sent the dollar soaring, the Japanese yen quickly began losing its footing against the greenback. Despite official Japanese data that showed a second consecutive quarter of growth, on 26th May the USDJPY pair broke above 123 yen, a level it hadn’t reached since July 2007 and inched towards 124 yen by the month’s close.