Currency Market Analysis

May 22, 2015 | Currency Market Analysis

Global Themes

Daunting hurdles ahead of the U.S. dollar today caused it to drift a little further from two-week highs touched earlier this week against a currency basket. The dollar is on track for its first weekly rise in six weeks thanks to markets’ renewed focus on policy divergence between the U.S. and euro zone central banks. Many expect the Federal Reserve to boost interest rates later this year while the coming weeks could see the European Central Bank (ECB) strengthen its already powerful stimulus to support growth in the 19-nation bloc. For the dollar to clinch its first winning week in a while, it needs to weather an important reading on U.S. inflation, a corner of the world’s biggest economy the Fed is eyeing like a hawk to decide when to boost interest rates for the first time in nearly a decade. Also in focus today is a 1 p.m. ET speech by Fed chair Janet Yellen on the outlook for the U.S. economy. The dollar is highly responsive to news on the U.S. interest rate outlook so it could see an outsized move depending on the tone of the inflation report and Ms. Yellen’s remarks. Canada’s loonie was steady ahead of top-tier local data today on inflation and retail spending.


The yen rebounded from two-month lows after the Bank of Japan Friday stood pat on policy and sounded sanguine on the outlook for the world’s No. 3 economy. The Japanese unit also benefited from trickling U.S. Treasury yields which lessen the dollar’s allure.


Friday was off to a happy start for CAD buyers as the loonie hit one-month lows. The loonie was injured by news today of a bigger than expected fall in area inflation. Inflation fell further behind the Bank of Canada’s goal of 2 percent, slipping to 0.8 percent annually in April. The core number unexpectedly fell by a notch to 2.3 percent. Retail sales rose 0.7 percent in March but that was less than half the prior month’s surge of 1.5 percent. Cooler inflation will increase the risk of the Bank of Canada coming across more cautiously when it renders a policy decision on May 27.


The latest look at U.S. inflation was both dollar- and customerpositive. Standing in the way of an imminent Fed rate hike is healthier U.S. inflation. The latest number offered progress with core consumer prices unexpectedly rising 1.8% annually in April. The uptick in inflation will pull forward market expectations of higher U.S. interest rates from later in the year which is favorable news for customers that benefit from a strong dollar. Market uncertainties remain high with another risk event seen hours away when the Fed chair speaks on the U.S. outlook at 1 p.m. ET.


This week, so far, has proven the best for U.S. importers in more than a month. The euro is on course for its first weekly decline since early April. The ECB played a big part in the euro’s under performance after a senior official said the central bank would redouble its monetary stimulus over the coming weeks ahead of an anticipated lull in the bond market later in the summer. Stronger stimulus over the short run could have the added effect of putting lids on both skyrocketing area bond yields and the euro which had outperformed over the past month when it hit three-month highs. Germany’s big Ifo survey of business optimism lost a step for the first time in seven months, but by holding on elevated terrain it had little impact on the euro.


Despite the pound’s appreciation over the past few days, it was still on pace to log a losing week against the greenback, news that should hearten American companies and encourage them to take advantage of the move by paying GBP-denominated invoices at more affordable prices. The pound waxed and waned on the week, hurt initially by the weakest U.K. inflation since the 1960s, a subzero reading of -0.1 percent. But the pound pared its decline in subtly hawkish central bank minutes and news that U.K. consumers went on the biggest spending spree in five months.

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