Currencies

Beyond the Fed: A wave of central bank actions have shaken currency markets

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While much of the focus on Wall Street in recent days has centered on the Federal Reserve, central bank officials from elsewhere in the world have also put policy actions into effect, roiling currency markets and sparking action in related exchange traded funds.

This has come as the Bank of England, the Swiss National Bank, the Bank of Japan and the Central Bank of Turkey have all announced policy decisions in recent days.

Federal Reserve

The U.S. central bank once again raised rates in the U.S. by an additional 75 basis points, bringing the current key rate to 3.25%. The recent hike follows four other hikes this year, totaling a 225-basis-point move higher. Meanwhile, projections from the Fed point to another 125 basis points worth of increases on the horizon.

This aggressive advance in interest rates has driven gains in the dollar. While the buck cooled off on Thursday, the currency has seen a steady march higher in 2022.

The Invesco DB US Dollar Index Bullish Fund (NYSEARCA:UUP) and WisdomTree Bloomberg U.S. Dollar Bullish Fund (NYSEARCA:USDU) both track the dollar’s moves. On Thursday UUP and USDU are near flat. However, on a year-to-date perspective, the two funds are +15.6% and +12.4%, respectively.

Bank of England

The BoE lifted its key interest rate for the seventh straight time as officials look to combat inflation. The BoE increased its policy rate by 50-basis points, sending its interest rate to 2.25%. Market participants were hoping for a higher move and as a result the British pound traded slightly lower against a basket of currencies. The pound has also suffered of late against the rising U.S. dollar, trading near a 22-year low against the greenback.

The Invesco CurrencyShares British Pound Sterling Trust (NYSEARCA:FXB), a British pound-focused fund, declined Thursday by 0.1%. For the year so far, the ETF is -16.5%.

Swiss National Bank

In another recent rate hike, the SNB decided to raise interest rates by 75 basis points. This took the country’s key rate out of negative territory and to a level of 0.5%.

The move higher brings the SNB rate positive for the first time since 2011. In response to the move, the Swiss franc dropped against the dollar, euro and yen, as well as global currencies.

The Invesco CurrencyShares Swiss Franc Trust (FXF) in turn dipped by 1.3% during intraday trading. Bigger picture, the Swiss franc ETF is lower year-to-date by 7.1%.

Bank of Japan

The BoJ kept its key rate at -0.1% during its latest policy conference. However, the Japanese officials did step in to intervene in the currency market for the first time since 1998. This came after the yen fell to a 24-year low against the U.S. dollar.

Due to the intervention, the yen gained ground and has found itself at the top of the currency pile, outperforming all of the other major currencies on Thursday.

The Invesco Currencyshares Japanese Yen Trust (FXY) has jumped 1.1% off the strong moves from the yen. Still, FXY sits lower on the year by 19.2% as the Japanese yen has been one of the worst performing major currencies this year.

Central Bank of Turkey

Turkish central bankers unexpectedly slashed the country’s key rate by 100 basis points, reducing the figure to 12% even as the nation is facing rampant levels of inflation. Turkey currently faces inflation levels of 80%, its highest levels recorded in 24 years.

While there are no direct Turkish currency ETFs on the market there is the iShares MSCI Turkey (TUR), which tracks Turkish equities. On Thursday, TUR is +2.6% and +16.9% in 2022.

See below a chart of the Y/Y inflation levels that the five nations discussed are facing. In broader financial news, major market averages and their accompanying mirrored ETFs (NYSEARCA:SPY), (VOO), (IVV), (QQQ), and (DIA) are all in the red as recession fears swirl the air.

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