Global Themes

Bullish news from Europe this week caused the U.S. dollar’s slide to gather pace, knocking it to its lowest in three years versus the single currency. The wild stallion single currency galloped to December 2014 highs after hawkish ECB minutes caused many to bring forward the timeline for an eventual interest rate hike. The euro’s spike was compounded by reports of progress on the political front in Germany with Chancellor Angela Merkel making progress toward a stable majority government. The greenback’s 1% dive against the euro drove it to four-month lows on a trade-weighted basis. Sterling strengthened to 1 ½ year highs. Commodity currencies from Australia and Canada were subdued after China reported slower trade growth and oil shed a percent. On the data docket today are critical readings on U.S. inflation and retail spending. Any disappointment would risk an accelerated slide in the U.S. currency.

GBP

Sterling climbed to 1 ½ year peaks against the dollar, largely riding the coattails of the rallying single currency. The market also seemed to be taking the bright side of mixed U.K. data this week. Forecasts for fourth quarter growth brightened at the margin after industrial production topped forecasts. The big event on the pound’s radar is a reading of December inflation on Jan. 16. Consumer prices are expected to cool a tick to a still elevated 3%. If inflation proves stubbornly high, the Bank of England may need to bring forward plans to suppress it with a pound-positive interest rate hike.

CAD

Like the U.S. dollar, Canada’s currency remained on the hot seat as festering concerns about Nafta weighed. Commodity units also weakened in sympathy with oil markets with crude down a percent to $63, below multiyear highs. Looming next week is the Bank of Canada’s first policy meeting of the year on Jan. 17. A rate hike, considered a near certainty days ago, is now seen as a closer call in the wake of Nafta uncertainty reaching a fever pitch. No increase in lending rates next week from 1% would leave the Canadian currency at risk of a slide.

EUR

The euro exploded to December 2014 highs as its bullish narrative received reinforcement this week from hawkish minutes from the ECB’s previous meeting and signs of Germany finally getting its political house in order after inconclusive elections last fall. The ECB minutes indicated the central bank may upgrade its policy guidance in early 2018. The hawkish minutes were consistent with a strengthening case for an eventual interest rate hike. Meanwhile, Angela Merkel reportedly is making progress on a ‘grand coalition’ government with the Social Democrats, news that diminished political uncertainty that has checked upside in the single currency.

USD

Data showing hotter underlying inflation in the U.S. helped to slow the dollar’s retreat. Core inflation, which excludes volatile food and energy prices, unexpectedly rose a tick to an annual rate of 1.8% in December. That’s not the Fed’s main gauge of inflation but it’s consistent with the central bank’s view that strong growth and hiring would eventually translate into higher inflation, a scenario that’s necessary to keep it on a higher rate path. Retail sales met forecasts with a 0.4% rise in December. The dollar could benefit if the euro’s rally should succumb to pre-holiday weekend profit-taking. U.S. markets will be closed Monday (Jan 15) for Martin Luther King, Jr Day. 

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