Global Themes

Another restless night of selling drove the U.S. dollar to fresh multiyear lows. But by daybreak Friday the U.S. currency found a modicum of support. The buck stabilized with modest gains after notching its lowest in more than three years against the euro and its weakest in 15 months against the runaway yen. The descent also has driven the U.S. currency to nearly two-week lows versus rivals from Britain and Canada. Despite relatively robust vital signs, the dollar can’t seem to catch a break. Those positives include a sound economy, rising Treasury yields and expectations of a series of interest rate hikes this year. Instead, the U.S. currency has been shunned for a mix of factors like a global recovery seen as more youthful and energetic than America’s which could allow rival central banks to guide lending rates higher sooner rather than later. The oversold dollar could see some short-covering buying today ahead of the long holiday weekend.

CAD

Canada’s dollar surrendered some gains after climbing overnight to nearly two-week highs. The loonie has benefited from the greenback’s slump that had it on track for its worst week in two years. Scope for C$ weakness looks muted with oil prices up and above $61. After a listless week of Canadian data, things pick up in earnest next week with news on retail sales Thursday and consumer inflation Friday. 

ZAR

The rand cruised to new three-year highs on euphoria over President Zuma’s resignation this week which ended a rand-negative leadership crisis. South Africa elected Cyril Ramaphosa as president. Mr. Ramaphosa has vowed to stamp out corruption and help revive one of Africa’s biggest economies. While the short run prospects for the rand have brightened, the extent to which it appreciates may lie in the hands of global stock sentiment. Any renewed meltdown in stocks would bode negatively for higher-yielding emerging market currencies.

GBP

U.K. pound flirted with two-week peaks overnight until it tripped and fell over tepid news on the U.K. consumer. Retail sales underwhelmed with a mere 0.1% rise in January, below forecasts of a 0.5% increase. The disappointing data cast some doubt on the degree to which the Bank of England can raise interest rates from 0.5% to bring down elevated inflation, as higher borrowing rates would risk putting a stronger headwind on the consumer. The top event on the pound’s radar next week is Britain’s monthly jobs report on Feb. 21.

JPY

The yen scaled fresh 15-month highs against the dollar despite Japan’s tapping of Gov. Kuroda, the chief architect of Tokyo’s low rate policies to revive the world’s No. 3 economy, for another 5-year term at the helm of the Bank of Japan. The yen is flying higher and weathering typical headwinds of improved stock market sentiment and rising U.S. Treasury yields to four-year peaks. Part of the yen’s surprise strength stems from brightening prospects for the global economy that could potentially allow the BOJ to reduce stimulus sooner rather than later.

USD

The dollar recovered from an overnight tumble to 2014 lows on a trade-weighted basis. The buck’s breather may be more a function of global holidays than any tempering of decidedly bearish sentiment. Asia is off to celebrate the Lunar New Year. Wall Street has Monday off for Presidents’ Day. Dollar bears are in control despite America’s sound economic shape. Treasury yields are rising with the 10-year moving closer to 3% this week, a four-year high. But the rise could be partly for the wrong reason. Some may perceive the U.S. as a fiscally riskier bet given America’s big budget deficit. Dollar sentiment looks ahead to congressional testimony on monetary policy by Fed Chairman Jerome Powell on Feb. 28, inflation data on Mar.1 and the next jobs report on Mar. 9.

EUR

The euro softened Friday but not before clocking fresh three-year highs against the dollar. Traders have pulled out their pro-euro playbooks, helped by the recovery in global stocks that’s bolstered market optimism and risk tolerance. Before the big selloff in stocks, the euro was on tear on the view that its steadily recovering economy could put the bloc’s central bank, the ECB, on a faster track to reducing stimulus and raising borrowing rates. And with euro zone interest rates at rock bottom levels, they seemingly have more room to the upside than the U.S. which could be about halfway through its rate tightening cycle.

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