Dollar and pound prosper in May; the Mexican peso, the weakest performer
31 May 2016 · 3 min read
The United States Federal Reserve’s change in tone was the main catalyst behind the movement on the currency market in May. Brexit developments and erratic oil prices also had a significant influence. The U.S. dollar and the pound sterling have been the winners; the Japanese yen and the commodity currencies were the losers.
US dollar’s Fed-fuelled upswing: The Federal Reserve has radically changed the tone of its rhetoric. Several officials and even chairwoman Janet Yellen have backed the idea of approving a second interest-rate hike in a short space of time, as part of the body’s monetary normalisation cycle. This, in turn, has driven gains for the dollar.
In May, the greenback appreciated nearly 3% against the euro, more than 4% against the yen and some 3.5% against the Swiss franc.
Pound rebounds amid dwindling support for Brexit: The pound sterling was boosted by the publication of several survey results showing growing support for the campaign to remain in the EU ahead of the referendum on 23 June, although the enthusiasm faltered on the last day of the month, as two polls showed an opinion shift in favour of the Brexit.
Fears of the United Kingdom leaving the EU waned in May, helping investors to regain confidence in Britain’s economic prospects. The pound climbed 3.15% against the euro and 5% against the yen, although gains were trimmed on May, 31 by unexpected opinion shift shown by the latest opinion polls.
Yen suffers its worst fall in a year and a half: The Japanese currency has tumbled for a number of reasons, foremost among them the expectations that the Federal Reserve will lift rates, alongside rising risk appetite – which has led the S&P 500 index to rally strongly – and the Japanese Finance Minister’s explicit threats to intervene in the market in order to halt the yen’s appreciation..
Commodity currencies, chief victims
Several currencies that hinge heavily on raw materials have suffered – headed by the Mexican peso and Australian dollar, plus the Norwegian krone and Canadian dollar to a lesser extent – as a result of the Chinese economy’s testing times, not to mention the weak, rocky recovery of oil prices.
Anticipation surrounding the Fed’s mooted rate raise has further squeezed the Mexican peso. The Mexican currency was the hardest hit in May, slumping 7% against the dollar due to a combination of adverse factors.
On the one hand, the aforementioned rampant speculation about a US rate increase has escalated fears that investors in Mexico could stampede for the exits, flocking to the more profitable and, above all, safer assets available across the border.
On the other hand, the erratic movement of oil prices, which have still failed to regularly break the $50 barrier, has heaped more pressure on the peso. Mexico is among the top ten oil producers, and low crude prices mean a substantial drop in government revenues.
Australian dollar, hindered by raw materials prices: The ‘Aussie’ is another currency that lost out in May. Falling raw materials prices, particularly for iron and copper, saw the AUD slide almost 5% against the US dollar.