The EBS Report

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Welcome to The EBS Report – covering product, technology, and key trends in one of the world's largest and most liquid FX markets.

  • 27 Jan 2022
  • By CME Group
  • Topics: EBS

Six Themes to Watch In 2022

As we begin 2022, several influential macro themes will be impacting the FX market. The Fed lift-off should help the dollar, but not across the board. Historically, in conditions like these, commodity currencies have performed well but some more than others, and some local markets look more interesting than others for a year of higher interest rates. If volatility continues to pick up and the pandemic continues to unfold, we have highlighted six areas to watch over the next year, and ways in which to monitor and track these markets through CME Group tools, along with a view of CME Group’s various listed and OTC markets where you can execute your FX risk.

1) Central Bank Activity

The January FOMC Minutes showed that Fed officials planned to accelerate the end of the quantitative easing program adopted at the onset of the pandemic. Further, several FOMC members have suggested that the Fed might begin raising rates as soon as March. How quickly the Fed moves might still depend on economic data over the next few months. European Central Bank President Christine Lagarde has made it clear that conditions to raise rates are very unlikely to be satisfied this year. She warned that the ECB must not rush into a premature tightening of monetary policy. Inflation is the one to watch, as Lagarde has argued that the drivers of these pricing pressures were likely to fade over the medium term, which is the horizon that matters for monetary policy.

On December 16, 2021, the Bank of England did raise rates after all, surprising investors, despite the most obvious change in the economic outlook being a worsening of the pandemic. The bank's monetary policy committee voted by a margin of eight to one to raise interest rates from 0.1% to 0.25%.

2) Increase in FX Volatility

Volatility in the FX market rose slightly at the end of 2021 as positions on opposing sides have been taken on how aggressively central banks will tighten monetary policy in the face of surging inflation which exacerbated swings in global currencies. Though the volatility is still low compared to historical levels, some investors believe the elevated levels of volatility are unlikely to subside anytime soon, making it a hot topic to watch in 2022 – could it be the year high volatility returns to currency markets?

3) Metals Correlation with Inflation

Gold and silver are typically negatively sensitive to changes in investor expectations regarding Fed rates. Most often, shifts in investor expectations towards tighter monetary policy put gold and silver prices under downward pressure. 2021 was no exception. As investors moved towards anticipating as many as seven or eight Fed rate hikes over the course of 2022 and 2023, gold and silver prices moved sideways despite U.S. inflation rates rising towards 7%. Now that expectations for Fed rate hikes are reflected in the forward curve, however, this might give precious metals further room on the upside should inflation continue to surprise on the high side or should the Fed tighten policy more slowly than investors currently anticipate. 

A firmer dollar will make commodities more expensive for buyers using other currencies, and China’s role in the future of the metals market should not be underestimated. China is expected to continue to take around 45-55% of global consumption in base metals and continue to be the world's biggest refiner of metals, accounting for between 35% and 55% of total global production. There has been some evidence that China’s economy is slowing under the strain of high debt burdens and a possibly overextended real estate sector.

4) Market Moving Political Events

The French presidential election in April and legislative elections in June along with the U.S. midterm elections in November could generate significant market responses. The ongoing situation in the Black Sea region as well as tension in the Middle East and in Asia could also potentially impact markets.

5) Local Markets

Slower growth in China and the Fed taper have contributed to a relatively downbeat outlook for emerging markets, but could the mood be set to change in 2022? Emerging markets are far better equipped to deal with the COVID-19 pandemic than they were a year ago. The threat of new variants presents an ongoing risk to be aware of, but the vast majority of local and emerging markets are on track to inoculate large proportions of their population in the coming months, highlighting positivity with respect to ongoing recovery in economic activity. China stands out as an LM to watch in 2022, where the reduced availability of credit in China was certainly felt during 2021, but regulatory noise may have peaked and policy is expected to become more stimulative into 2022.

6) Regulation

Regulation is likely to be a hot topic for 2022 with a few changes on the horizon. The final Phase 6 of uncleared margin rules (UMR) and standardized approach to counterparty credit risk (SACCR) implemented for U.S. banks being two of the main challenges. Of all the market participants, real money accounts may face the greatest challenge in the face of UMR. It is likely there will be a growth trend in listed FX futures, and the use of EFRPs and blocks will be a logical part of that trend, given their effective substitution for the OTC market. U.S. banks will also be intensifying their efforts to optimize FX swaps and forwards portfolios affected by the new capital regime for SACCR. The FX market is highly affected by these two pieces of regulation, as well as the market embracing new last look guidance and TCA requirements under the FX Global Code.

Watch and Analyze

Tool Description Central Bank Activity Increase in FX Volatility Metals Correlation with Inflation Market Moving Political Events Emerging Markets
CME FedWatch Tool Allows market participants to stay up to date with the latest probabilities of FOMC rate moves          
CME BoEWatch Tool Uses MPC SONIA futures prices to gauge market expectations of the future course of the BoE monetary policy          
CME FX Vol Converter Enables OTC traders to monitor CME FX options pricing more easily by translating CME FX options vol from contract terms into OTC terms          
CME Volatility Index (CVOL) Provides a representative measure of the market’s expectation of 30-day forward risk, a reliable way to keep up with FX options markets.  
CME FX Market Profile

CME Gold and Silver Market Profile
Brings together listed and spot FX in one comprehensive view so that traders around the world can compare and analyze the complementary liquidity available in these markets
EBS Trade Activity Dashboard (launching Q1 2022) Will enable users to capitalize on a single, reliable price of reference from EBS, supporting more effective TCA and execution analysis

Market Data and Trading

Platform Products Execution Firm Pricing Only Both Firm and Last Look Offered Historic Market Data Real-Time Market Data
EBS Market Spot FX and Spot precious metals Central Limit Order Book    
Available on CME DataMine

Available on Refinitiv and Bloomberg
OFF and ON SEF/MTF NDFs          
EBS Direct Spot FX and spot precious metals, off-SEF/MTF FX NDFs ESP (Executable streaming prices)        
EBS Direct Forwards FX outrights and FX packaged transactions of forwards (both on- and off-MTF) RFQ/RFS          
CME FX Futures FX futures   Listed FX options, blocks, and EFRPs as alternative execution methods Central Limit Order Book    
Available on CME DataMine

Available on Refinitiv and Bloomberg
CME FX Link Spreads between OTC FX spot and CME FX futures Central Limit Order Book    
Available on CME DataMine

Available on Refinitiv and Bloomberg

*eFix - The eFix Matching Service acts as a central market utility to reduce benchmark fixing risk. The service delivers improved global matching opportunities for the most frequently used daily benchmarks and fulfills a need for increased transparency and full auditability around fix order execution.