Foreign Exchange Report: Q1 2021
Addressing trends in major currencies can help supply chain managers understand how prices of their sourced materials may change in the immediate future. This overview is a quick look at how foreign currencies have changed over the last few months.
The US dollar remained strong against all major currencies throughout the first quarter. The dollar regained its November high buoyed by a recovering US economy, dwindling unemployment rates, and a higher inflation rate to give it the fastest growth in decades. The American 10-year Treasury bond rose to 14 months high to top 1.7%, reflecting the optimistic growth outlook. The dollar's rally is likely to continue backed by increased consumer spending after the March stimulus payments. The economy is expected to recover quickly, buoyed by the $1.9 trillion America Rescue Plan. However, the growth could be curtailed by high market interest rates, especially if interest rates jump up.
The British pound continued a spirited performance against the US dollar in Q1, 2021. The pound rose by 3.1% in February to mark its fifth month of straight gains and a three-year high before shedding the progress towards the end of March. UK's successful Covid-19 vaccine rollout is fanning the increases and fostering positive economic growth. The UK gilt yields rallied to a one-year high, accounting for rising interest rates and inflation expectations. A sustained vaccine rollout speed could see a consumer-led economic recovery that'll lock further gains. However, Brexit could curtail further improvements by affecting trade flow between the European Union and the UK.
The euro has consistently struggled against the dollar and other G10 currencies for the first quarter of 2021 except safe-haven currencies like the Japanese yen and Swiss franc. The euro started on a high of 1.2340 in January before declining to 1.20 in March. The euro registered a 2.5% loss against the dollar by the end of the first quarter. The loss is expected to continue against the backdrop of a sluggish Covid-19 vaccine campaign and surging infections. The uncertainty of the vaccine rollout reduced investors' appetite for the euro in the face of increasing pandemic restrictions.
The yen maintained a steady decline against the dollar in the first quarter of 2021, moving from 102.83 in January to 110 in March. The risk-on market rebuffed the yen's negative yields and safe-haven profile as investors sought high returns over risk control. The yen was pressured by the US stimulus package, high vaccine rollouts, and rebounding global economies. The yen's sliding path is likely to continue after hitting a 9-month low in March due to growing global optimism. However, the third wave of Covid-19 infections could shake the market's confidence and steer investors toward the safer yen.
The Australian dollar ended the first quarter weaker against the dollar, weighed down by the high US bond yields hitting equities and pressuring commodities. The AUD/USD pair fell to near 0.800, the lowest market level in five years, reversing a three-year high. The demand for the Australian dollar ties closely to global risk appetites, making it vulnerable to the large movements registered in the commodities and share markets at the end of March. The Australian economy has remained strong due to low employment rates, strong pandemic response, and significant growth numbers. However, the reducing JobKeeper program could result in spiking unemployment rates leading to a weaker AUD.
The Canadian dollar has emerged as the best performer this quarter among the G-10 currencies. It rallied to a 3-year high bolstered by oil, attaining a $67 high last seen in October 2018, but lost steam towards the end of March occasioned by low energy demand in Europe. The Canadian economy has shown surprising resilience, driving the USD/CAD to lows of 1.2360. Dwindling unemployment rates, strengthening the economy, low inflation, and interest rates could set the stage for further gains against the US dollar.
The Swiss franc has maintained a steady rally against the dollar, starting from 0.875 to peak at 0.944 in March before easing back the gains. The Swiss National Bank teamed the weakening of the Swiss franc 'welcoming and pleasing.' An improving global economic outlook lowers the demand for the safe-haven currency. But the country forecasts a quick recovery and grow its GDP by 3% this year as it managed to minimize the devastating effects of the pandemic. The flawed vaccine rollout in Europe may yet drive investor appetite for safe-haven assets like the franc.
The Chinese yuan has maintained a steady rally against the dollar in the first quarter but saw substantial re-rating in March. Rebounding global economies shifted the focus away from China, tumbling the yen to its lowest level since November. China's lack of transparency during the onset of the coronavirus epidemic, an aging population, and a lack of fundamental reforms could cede further grounds against the dollar.
This information is intended to be a general overview and should not be taken as investment advice. Market data can help supply chain managers sourcing materials from around the world better understand how prices are likely to change in the near future. This overview is a general look at how world currencies are faring.