The third quarter of 2022 may go down in the history of financial markets as a quarter in which bond and stock market declines may have deepened, and when the US dollar strengthened to levels not seen in 20 years. The Federal Reserve or ECB aggressively raised interest rates during this time, and the Japanese government intervened in the foreign exchange market.
Nevertheless, it also seems not the case that all markets were doomed to continue declines in the ending quarter. Although there were not many, there were also instruments with positive returns. Of the popular markets, natural gas futures in the United States seem to have seen the largest quarterly increase. Over the past three months, the price of natural gas in the U.S. rose 28 percent to $7 (XNGUSD on the Conotoxia MT5 platform). Transiently, futures were traded even in the $10 region. Another market that could also count this quarter as a success is palladium (XPDUSD). The price of futures for the metal rose about 15 percent to $2192. The price of the dollar index went up by about 7.6 percent, while the price of contracts for the VIX Volatility Index (VIX) rose by more than 8 percent.
Source: Conotoxia MT5, VIX, W1
What to expect in the coming quarter?
The last quarter of the year could be an exciting quarter especially, in terms of pricing a possible peak in interest rate hikes by the Fed. For the moment, the interest rate market assumes that the peak in US interest rate hikes might occur in February/March 2023. However, the financial market may be discounting faster what is yet to come in the Fed's decision. Statistically, market interest rates reached their peak earlier than the Fed's last hike decision in the cycle. Looking at the forward rate agreement (FRA) market, where investors trade for future interest rates, we can see that as early as the end of December 2022, the USD market interest rate could reach 4.7 percent. This is coincidentally then with the target level for the federal funds rate, which is currently estimated at 4.5-4.75 percent. Thus, if nothing unexpected happens, by the end of the year the topic of US rate hikes could be behind us.
Nevertheless, for other currencies, such as the EUR, AUD and GBP, next quarter might be a further step in rate hikes, which could continue for up to a total of three more quarters ahead. What could this mean? Well, the Federal Reserve may end the cycle when the ECB, RBA or BoE may continue it. As a result, the interest rate differential between the dollar and other currencies may become smaller and smaller as time goes on. This, in turn, could cause the dollar to at least move into a larger price and time correction.
Source: Conotoxia MT5, USDIndex, D1
Daniel Kostecki, Director of the Polish branch of Conotoxia Ltd. (Conotoxia investment service)
Materials, analysis and opinions contained, referenced or provided herein are intended solely for informational and educational purposes. Personal opinion of the author does not represent and should not be constructed as a statement or an investment advice made by Conotoxia Ltd. All indiscriminate reliance on illustrative or informational materials may lead to losses. Past performance is not a reliable indicator of future results.
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