Global Themes

A three-day rally in the U.S. dollar came to an abrupt halt Wednesday on reports that China may slow or stop its purchases of U.S. government bonds. The greenback tumbled 0.6% against the euro and twice as much against the yen which clocked 6-week peaks against its U.S. rival. Sterling steadied while a 1% rally in oil above $63 boosted the Canadian dollar. The buck showed some fragility Tuesday after Japan’s central bank announced it would buy fewer long-term bonds, a move some considered a baby step away from lavish stimulus aimed at boosting the world’s No. 3 economy. The China story took a swipe at the dollar given that Beijing is the world’s biggest foreign buyer of U.S. government debt. The solid shape of the U.S. economy could help limit weakness in the dollar. All eyes remain on U.S. reports Friday on consumer inflation and retail sales. 

JPY

A burst of strength propelled the yen to six-week highs against the greenback. The yen continued to squeeze more juice out of hawkish news Tuesday that the Bank of Japan would buy fewer of its long-term bonds. The decision was considered a minor tweak in policy, though one seen as a possible baby step toward a more meaningful reduction in stimulus down the road. The yen also benefited from the dollar’s decline on reports that China may curtail or stop buying U.S. government bonds. A backdrop of soaring U.S. Treasury yields, with the 10-year close to 2.6%, suggests the decline in USDJPY may be short-lived.

CAD

U.S. dollar weakness put a tailwind on the Canadian dollar but not a forceful one. Canada’s dollar largely sat out a rally in oil prices toward $64. Loonie enthusiasm has moderated somewhat after the Canadian currency clocked three-month highs last week in the wake of a spectacular jobs report. Moreover, while markets have increased bets on the Bank of Canada raising interest rates on Jan. 17, some skeptics remain given sluggish underlying inflation.

GBP

A mixed bag of U.K. data left the pound little changed. Sterling failed to capitalize on the greenback’s renewed retreat after factory growth topped expectations, but the trade deficit widened by the most in five months. The data was a bit inconclusive on how the British economy fared over the final three months of 2017, though generally consistent with an economy stuck in a low gear.

EUR

The euro jumped toward a key level against the dollar after the U.S. currency stumbled on reports that China may slow or stop purchases of U.S. Treasurys. That would be a very big deal since China is one of the biggest buyers of U.S. Treasurys. While on higher ground, the euro’s short run prospects have cooled on the view its rally may be overdone. Moreover, the ECB meets in a couple weeks and may use its first gathering of the year to talk down the euro whose strength puts downward pressure on already low inflation.

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