Global Themes

The U.S. dollar was mixed but mostly firmer Friday, though still on pace to log a weekly decline. The dollar rebounded against its European counterparts but lost ground to the yen. Markets are in a cautious state of mind, buoying safe haven assets, with a French presidential vote less than 48 hours away. The euro descended from three-week highs ahead of the Sunday vote in French that will determine which two of the nearly dozen candidates will advance to the decisive runoff vote on May 7. Polls suggest centrist Emmanuel Macron and far-right Marine Le Pen could be the top vote getters and faceoff in next month’s runoff. Any surprise outcome could cause dramatic swings in euro volatility. Sterling pared some off big weekly gains after data on consumer spending disappointed. The loonie fell to six-week lows ahead of Canadian inflation data this morning.


The euro weakened nearly a cent below three-week peaks as players refrained from staking major bets ahead of France’s vote on Sunday. Polls and markets appear to be pinning their hopes on a candidate with a more moderate platform ultimately becoming president, such as pro-EU centrist Emmanuel Macron. However, the polls could prove unreliable given reports of a high number of undecided voters in the run-up to the first round Sunday. The euro could stage a sharp rally towards 1.10 should Ms. Le Pen get eliminated from the run-off vote on May 7, given her preference to put France’s EU membership in the shredder. On the other hand, the euro could tumble towards 1.05 if the Eurosceptic candidates (i.e. Ms. Le Pen and/or far-left Jean-Luc Melenchon) put in stronger than expected showings.


Sterling fell Friday but was still on track to finish the week nearly 3 cents stronger against the dollar. The pound squandered part of a rally that had propelled it to six-month highs on Tuesday, the day Britain’s leader said the country would hold early elections in June. Elation over the early election, which the prime minister hopes will increase her Conservatives’ majority in parliament and give her more authority to call the shots on Brexit negotiations, gave way to sobering news on the health of the U.K. economy. British retail sales plunged nearly 2 percent in March, compared to forecasts of a modest decline, showing how higher inflation is squeezing consumer spending, a key growth engine since last summer’s Brexit referendum.


Already at six-week lows, the loonie is at risk of plumbing new troughs after local inflation showed a bigger than expected slowdown. Consumer prices were up just 1.6 percent annually in March, down from 2 percent – the Bank of Canada’s bullseye – in February. Tepid inflation gives the BOC maximum leeway on interest rates, allowing them to potentially lower them should their ‘significant uncertainties’ over the outlook intensify in the months ahead. At the very least, tame inflation, coupled with a wavering trade sector, suggests low lending rates for longer, boding bearishly for the loonie against the dollar whose central bank has penciled in multiple rate hikes this year.


The dollar was on track for a mixed performance this week with losses against its European rivals but gains versus the yen and Canadian dollar. The dollar has struggled to gain traction recently as confidence cools in the Trump administration delivering the economic goods any time soon, and softer data cement expectations for another tepid start to the year for the world’s biggest economy. The next two weeks could be pivotal for the dollar with the Fed rendering a decision on May 3 followed by the next monthly jobs report days later on May 5. While the Fed is not expected to raise rates next month, its statement could potentially lay the groundwork for a move as soon as June.

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