What matters more for FX than anything else is diverging interest rate trends. More specifically, economies going in different directions and their respective central banks raising and cutting interest rates as a result.
Of course, we’ve not seen a lot of that in recent years, which Is why FX volatility has been lower. But there have been signs of potential this week. Yesterday the CAD weakened further on the possibility of the Canadian central bank cutting interest rates again, USDCAD moving above the 1.11 level overnight.
At the same time, a further sharp fall in the UK unemployment rate allowed cable to move higher, although just short of another new high for the year.
So the potential for divergence has increased so far this year, especially with a likely interest rate increase from the New Zealand central bank in the current quarter.
The caveat is that the differences globally are still relatively small, with Canada potentially cutting from an already low 1% and New Zealand hiking from 2.5%. We are not yet at a stage of mass carry trade picking up again, but it could well be a start on moving towards some more traditional drivers of FX that have been lacking in recent years.
Further reading:
UK unemployment rate
EUR/USD shoots higher on strong German/French PMIs
