Global Themes

No sign of a bottom for the cratering U.S. currency which deepened a slide on Friday, hitting fresh multiyear lows versus several peers. The dollar has been undercut by a confluence of bearish forces. U.S. inflation is running too cool at 1.4%, below the Federal Reserve’s 2% comfort level. Powerful hurricanes have literally clouded the U.S. economic outlook. In Europe, meanwhile, economic clouds are dissipating, a bullish scenario that is expected to allow the European Central Bank to taper stimulus after this year. The dollar is also losing favor to safe rivals from Japan and Switzerland on the eve of North Korea’s birthday which could result in more market-rattling missile launches. In a broad swoon, the U.S. currency fell to November lows against the yen, and hit its weakest in more than two years versus the euro and Aussie and Canadian dollars. Canada releases key jobs figures today that, if solid, could tip USDCAD below a key psychological threshold.

EUR

The euro rose to fresh 2 ½ highs Friday to the chagrin of Mario Draghi, the president of the ECB, who dubbed its ferocious revival this year as a source of uncertainty and a downside risk to growth. The ECB this week left policy unchanged and dialed up its concern over FX movements such as the euro’s more than 14% appreciation this year. Euro bulls, nevertheless, were emboldened by Mr. Draghi sounding more confident in the economic outlook, and how he signaled that an announcement on scaling back stimulus could come as soon as the ECB’s next meeting on Oct. 26. Until the stronger euro starts to show concrete signs of eroding the bloc’s recovery, the path of least resistance appears higher for the single currency.

GBP

Reassuring news on the U.K. economy helped the pound rise above key resistance that had held for five weeks. Sterling climbed to five-week peaks after Britain logged a smaller than expected trade deficit of GBP11.6 billion in July, and factory growth met forecasts with a modest increase. The pound’s outperformance will be on the line next week when the Bank of England meets (Thu Sept 14), and central bank-impacting data come due on Tuesday and Wednesday on inflation and unemployment. Any narrowing in the chasm between high inflation and paltry pay growth would risk further strength in the U.K. currency.

AUD

The Aussie dollar soared to mid-2015 highs as fading hopes for the Fed to raise interest rates again this year caused more greenback bulls to go into seclusion. U.S. dollar weakness helped the Aussie weather data showing a smaller Chinese trade surplus in August, a sign of moderating growth in Australia’s top trade partner. The top risk event for the Aussie next week will be Australia’s monthly jobs report on Thursday.

CAD

Canada’s dollar pared gains after a mixed monthly jobs report was inconclusive on the path for higher interest rates. Canada added 22,200 jobs in August, topping forecasts of 19,000, while unemployment dropped a notch to 6.2%, the lowest in nearly 9 years. The problem: all the hiring came from the less meaningful and typically lower paying part-time positions. The loonie has been on a bull run of late after Canada surprised with a rate hike this week which has Canadian borrowing rates (1%) nearly on par with the U.S., and threatening to leapfrog in the not too distant future, providing Canada can maintain its economic mojo.

USD

The dollar index sank to fresh 2 ½ year lows as chances of the Fed raising interest rates again this year eroded further this week to about a 20% likelihood. Two Fed officials, who get to cast votes on policy, spoke this week and noted soft inflation, a factor that can give central bankers pause in tightening monetary policy. Interest rate futures show a less than 50% chance of the Fed raising rates from a range of 1.0% to 1.25% until well into 2018. That suggests that Fed Chair Janet Yellen, if she doesn’t stick around after her term expires in February, may have already fired her final rate hike. Moreover, uncertainty over Fed leadership after the bank’s No. 2 official, Stanley Fischer, announced he would step down early in mid-October has added another layer of dollar uncertainty.

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