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Corporate Treasury Data Insights: interest rate volatility and the strengthening US dollar

Andrew Hollins
Andrew Hollins
Director of Corporate Treasury Proposition, Refinitiv

Andrew Hollins, Director of Corporate Treasury Proposition at Refinitiv, analyses the potential for further interest rate rises, the prospects for the global economy and fears that countries may use cryptocurrencies to evade sanctions. 

  1. Interest rates in many major economies are rising to combat the threat of inflation. What impact could this have on financial markets and the broader economy?
  2. As Russia is placed under more international sanctions, questions have been raised about how cryptocurrencies could be used by countries to circumvent sanctions.
  3. To help enhance workflow efficiency, FX traders are using machine learning.

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Chart of the Month

Strengthening US dollar

Markets continue to be driven by growing expectations regarding the pace, and magnitude, of central bank policy normalisation.

Approximately 250bps, 150bps and 90bps in hikes are now priced by year-end for the FOMC, BOE and ECB respectively. Therefore, it’s no surprise that interest rate hedging costs remain elevated.

In addition, the Fed is likely to start “quantitative tightening” (reversing QE) over the coming months (a process already started by the BOE).

As stated by Andrew Bailey, BOE governor, “there is very little experience of QT. There is none here and not much globally”. Therefore, the potential impacts of quantitative tightening (QT) are far from clear-cut.

Investors are familiar with plentiful liquidity and may not respond well once the process begins to reverse.

Not surprisingly then, implied volatility continues to stay elevated, keeping swaption and cap prices expensive. The rising-rate environment reflects a historical shift in financing conditions for the world economy after many years of low/negative rates and money printing.

This secular shift is currently driven by continued positive economic data surprises and the hawkish bias from central banks.

Of course, whether these central banks will deliver on expectations will greatly depend on how the growth outlook evolves. This remains uncertain not least because of Russia/Ukraine’s geopolitical instability and the negative impact on household incomes from elevated commodity prices.

Finally, the recent appreciation in the dollar is another source of concern for global investors, as it can historically signal further stress coming across capital markets. In the past, emerging markets often come under pressure during periods of significant USD strengthening and Fed tightening.

It remains to be seen how the latest combination of higher commodity prices and a stronger dollar will play out. However, it’s likely to only add to investor uncertainty and support ongoing market volatility.

Navigate market volatility with corporate treasury tools you can trust

More interest rate hikes from the Fed?

Roger Hirst looks at the onset of the rate hiking cycle and the additional re-pricing that has taken place since the first hike. Yield curves are inverting, but should we follow the usual sequencing of the last 30 years?

Inflation may make the gap from inversion to recession much shorter this time around.

In the Chatter, Kiran Ganesh of UBS Wealth Management outlines the prospects for rates and a few diversification strategies.

Watch the video explainer

News in Charts: downside risks abound for the global recovery

Recovery from the pandemic-induced recession has so far been rapid.

Generous fiscal support packages, particularly in the major economies, have enabled this swift bounce back. Now, however, the global economy is facing increasing headwinds.

What the charts tell us

Russia, sanctions and cryptocurrency

The latest round of sanctions against Russia have sparked fears that cryptocurrency may offer an innovative way for these sanctions to be circumvented.

More than this, recent developments have also served to highlight how important it is for financial services firms to always ensure effective sanctions screening.

Screening, due diligence, and the complex sanctions environment

How does machine learning benefit FX traders?

As FX trading firms seek to improve workflow efficiency and make better use of data, they are increasingly turning to innovative and advanced technology solutions.

How does Refinitiv Workspace for FX Trading use artificial intelligence (AI) and machine learning to enable users to improve productivity and customer service?

Discover more about our next-generation workflow tool for FX traders

Refinitiv Corporate Treasury Newsbeat

  • Refinitiv releases Evolution of Trading Report Series – Highlights key data and technology trends for equities, fixed income, and FX traders | Refinitiv, an LSEG business, has released the findings of its report series titled ‘Evolution of Trading’ covering equities, fixed income, and FX trading. Read more
  • WM/Refinitiv Spot Rates – request for client feedback | Refinitiv, an LSEG Business, announces the launch of the WM/Refinitiv Spot Rates (WMR) ‘Request for Feedback’ on key aspects of the WMR methodology and users’ requirements. Read more
  • Refinitiv Wealth Management Report – Getting Personal: How wealth firms can attract and retain the modern investor – Highlights data insights from investors | The study highlights the need for wealth managers to personalise the client experience through a combination of digital offerings and high-touch service, ensuring existing clients stay engaged and prospective clients feel that their money and their future will be cared for over the long-term. Read more

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