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Developed and emerging market currencies’ performance has been anything but uniform in recent weeks. Moreover, our measure of daily (realised) global FX volatility has surged to levels not seen since the UK referendum on EU membership in June 2016 (see Figure 1). Not only have major currencies taken very different paths but their paths have been increasingly choppy.

Figure 1: Global FX volatility has spiked to its highest level in nearly four years

Global FX volatility has spiked to its highest level in nearly four years

Source: 4X Global Research, BIS,

Note: * Spot/closing price. Basket weighted by currency-pair turnover in 2016; currency pairs versus US Dollar are AUD, CAD, CHF, DKK, EUR, GBP, JPY, NOK, NZD, SEK, ARS, BRL, CLP, COP, MXN, CZK, HUF, PLN, RON, RUB, ZAR, TRY, ILS, CNY, IDR, INR, KRW, MYR, PHP, SGD, TWD and THB

We attribute these twin developments to the fast-changing, at times self-reinforcing and often unpredictable inter-play between i) the spread of the coronavirus, which the WHO on 11th March classified as a pandemic, ii) the draconian steps which governments have taken, iii) central banks’ monetary policy easing, liquidity and macro-prudential measures and iv) brutal moves in equity, oil and government bond markets.

Forecasting where major currencies go from here in the long-run, let alone how they get there, therefore remains an exercise in faith as much as rigorous analytical work. As we argued in Financial markets gripped by “sell/buy now, think later,” conventional wisdom of how some FX markets should and will behave in this environment has been severely tested. However, there are rational explanations behind some currencies’ developments. Moreover, market positioning may give us a clue as to how they may behave in coming weeks or at least whether they are vulnerable to corrections to the upside or downside.

Dollar, Euro and safe-haven currencies outperforming, oil currencies sharply down

Figure 2 shows the change in Nominal Effective Exchange Rates (NEERs) – the trade-weighted average of a currency against a basket of currencies – since the S&P 500 peaked on 19th February. NEERs provide a more accurate measure of a currency’s overall performance and how it may impact a country’s trade competitiveness, inflation, growth and ultimately monetary and fiscal policies. Most central banks, including the People’s Bank of China, arguably use NEERs as an important input in their policy decisions, including whether or not to hike/cut policy rates.

Figure 2: Major currencies’ performance in past 3 weeks far from homogeneous, sometimes for good reason

Major currencies’ performance in past 3 weeks far from homogeneous, sometimes for good reason

Source: 4X Global Research, Bank of England, BIS, European Central Bank, Federal Reserve,

Note: Developed market currencies in red.

Japanese Yen, US Dollar and Swiss Franc – have appreciated in NEER terms. The notable exceptions are Sterling (-4.5%) and Australian Dollar (-5.8%).

The Euro NEER has recorded the fastest rate of appreciation (+5.1%), mainly due to the ongoing unwinding of historical short Euro positions (established to fund long positions in more risk-sensitive currencies when global risk appetite was still high). The Euro has lost a bit of ground in the past 24 hours, with markets seemingly left cold by the monetary easing measures which the ECB announced yesterday, but is still near its strongest level since September 2018.

The Dollar’s performance has been particularly impressive in the past ten days (+3.2%), a mirror image of an acceleration in US and global equities’ downturn, despite growing concerns about the speed and efficacy of the US government’s response to the coronavirus. The Dollar NEER’s rise to its strongest level in at least 14 years may only have a marginally negative impact on the not-particularly-open US economy (see Figure 3). The Atlanta Fed’s GDPNow estimate of US GDP growth in Q1, as of 6th March, was still for an acceleration to a very solid +3.1% qoq annualised. US President Trump has arguably taken a very different (read critical) view of the Dollar’s strength.

Figure 3: US Dollar NEER has surged to its strongest level since at least January 2006

US Dollar NEER has surged to its strongest level since at least January 2006

Source: 4X Global Research, Federal Reserve,

Note: Federal Reserve data only available from 2nd January 2006 till 6th March 2020, thereafter 4X Global Research estimates

Unsurprisingly perhaps the safe-haven Yen and Swiss Franc have been amongst the best performers, gaining 4.9% and 2.7% respectively. The Swiss Franc has weakened about 0.8% in the past 24 hours, weighed down by a rebound in European equity markets today, but remains within touching distance of its five-year high (see Figure 4).

The NEERs of oil exporting nations – Colombian Peso, Russian Rouble, Mexican Peso and Norwegian Krone – have weakened the most, tracking the 33% collapse in Brent crude oil prices in the past week.•

Non-Japan Asian (NJA) currencies, bar the more risk-sensitive Indonesian Rupiah, have only weakened modestly in NEER terms with the Taiwan Dollar broadly unchanged and the Chinese Renminbi up about 1%. No NJA central bank has cut its policy rate since Bank Indonesia on 20th February, broadly in line with our view, and we suspect they have been intervening in the FX market to keep their currencies’ on a tight leash (see Asian central bank policy rates - scalpel not knife, 7 February 2020).

Figure 4: Swiss Franc within touching distance of levels reached 5 years ago when SNB let its currency surge

Swiss Franc within touching distance of levels reached 5 years ago when SNB let its currency surge

Source: 4X Global Research, BIS,

Don’t under-estimate potential for reversals

It may arguably be foolhardy to go against trend at this stage, with the future evolution of the coronavirus still a critical “known unknown”. However, the risk of well-established currency trends reversing or accelerating abruptly should not be under-estimated.

For example, the Swiss Franc’s relentless appreciation is putting increasing pressure on a Swiss economy already suffering from the slowdown in international tourism and luxury retail and posting negative year-on-year CPI-inflation. The Swiss National Bank has so far seemed unwilling or unable to more actively reign in its currency but has a history of surprising markets with bold policy measures (e.g. letting the Swiss Franc surge in January 2015).

The Sterling NEER has slumped 2.8% this week to its weakest level since mid-October, according to our estimates, despite net-long Sterling speculative positions hitting a 97-week high of about £2.2bn on 3rd March (see Figure 5). In the past decade these net-long positions (recorded weekly) have only 28 times exceeded £2bn (or about 5% of the time). History, in our view, suggests that an unwinding of substantial, long Sterling positions would result in an acceleration in Sterling’s recent depreciation.

Figure 5: History suggests Sterling’s sell-off could accelerate if large long-GBP positions are unwound

History suggests Sterling’s sell-off could accelerate if large long-GBP positions are unwound

Source: 4X Global Research, Bank of England, Commodity Futures Trading Commission,

Note: * Long positions minus short positions;  **NEER is Nominal Effective Exchange Rate

For further information about 4X Global Research or to discuss a subscription to its research products and services, please email odesbarres@4XGR or call Olivier Desbarres on +44 (0)20 3811 0454

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Please note this article does not constitute investment advice. Investors are encouraged to do their own research beforehand or consult a professional advisor.

Olivier Desbarres

Olivier Desbarres

Olivier Desbarres is a Director and Founder of 4X Global Research, a London-based consultancy set up in 2017 to provide institutional clients and private investors with focused, actionable, innovative and independent research on Emerging and G20 fixed income and FX markets and economies.

Olivier has over 21 years of experience in the finance industry, including 15 years as a senior Economist, Rates and FX strategist for Credit Suisse and Barclays in Moscow, London and Singapore.

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