Global Themes

The U.S. dollar firmed after a broad fall on Monday. For months, the dollar has kept to an unpredictable pattern as markets continue to guess when the Federal Reserve might finally boost its key rate for the first time in nearly a decade. Conviction rose in a 2015 move by the Fed after jobs data last week showed the fastest pace of monthly hiring since December. But instead of embarking on a fresh upturn, lingering uncertainty about the health of the world’s biggest economy, and a sense that U.S. officials might not be as amenable to a strong currency, has restrained the U.S. currency’s performance. The euro meanwhile has benefited from a steady climb in area government bond yields which has narrowed the advantage comparable U.S. assets offer. And like the dollar, the euro totes baggage of its own that tends to limit bouts of strength. Greece continues to come up short in its bid for fresh rescue money to keep fiscally afloat. Markets this week will look to critical U.S. data on Thursday and Friday on the consumer, the main engine of U.S. growth, to help shape the dollar’s coming prospects.

GBP

Sterling weakened despite better than expected news today on Britain’s trade deficit which narrowed to £8.6 billion in April from a £10.7 billion shortfall in March. The data wasn’t enough to allay worries about slowing momentum in the U.K. economy with inflation below zero for the first time since the 1960s and growth in the crucial services sector running at fresh lows for the year. Signs of strengthening U.S. job growth and general improvement in the euro zone economy have also contributed to the pound’s underperformance. The pound could weaken further Wednesday if data on Britain’s factory sector (please see table below) should cool which is the expectation.

CAD

Oil us up, the U.S. dollar has shed its jobs-driven gains and the Canadian dollar is at its strongest in two weeks. Loonie sentiment perked up in Canada’s best jobs report in seven months in May. Canada’s addition of nearly 60,000 jobs hinted at the economy gaining momentum, welcome news that lowered the risk of further rate cuts north of the border. Oil was nearly a $1 stronger at $59 a barrel.

EUR

The euro lost a little ground after strengthening against its U.S. counterpart on Monday. The euro continued to enjoy general support from rising government bond yields in Europe that have made the euro a more alluring bet to the yield-seeker. The rise in yields has come from signs the bloc’s recovery continues to gain traction. In a good sign for second quarter growth, Germany on Monday reported a bigger than expected rise of 0.9 percent in industrial output. Greece remains a wild card for the euro with the potential to undercut rallies should markets grow more concerned about Athens’ ability to strike a deal for more money that for a long time has proven elusive.

USD

The dollar firmed after its Monday fall but overall kept to its monthslong unpredictable pattern of trade. Profit taking kicked in Monday after the dollar’s jobs-inspired surge on Friday. The dollar’s generally overbought status leaves it prey to profit taking following big bursts of strength. The move to cash in on the dollar’s rise was compounded by a report – later refuted – that the U.S. administration views a strong dollar as problematic. Over the longer run, the dollar should fare buoyantly if the Fed is seen on a path to raise interest rates this year. Volatility though should remain the name of the game for the dollar over the short run until market confidence meaningfully brightens in the outlook for the U.S. economy. The next major events on the radar for the dollar will be late week news on the U.S. consumer (please see table below), and a two-day Fed meeting that gets under way a week from today.