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Currency Market Analysis

Jul 13, 2015 | Currency Market Analysis

Global Themes

The U.S. dollar made broad gains Monday after Greece and its creditors finally reached a deal on a bailout which kicked the market spotlight to another top focus: Expectations the Federal Reserve would boost interest rates this year. It took all night and then some but Greece and its lenders reached a deal on up to €86 billion in financial assistance to the debt-laden nation. Markets emerged from the marathon negotiations relieved and hungry for risky, high-yielding assets. The dollar, an aspiring higher-yielder, rose against most of its top peers, along with global equities. Greece’s securing of a bailout helps reduce global uncertainty which also takes away a potential obstacle to higher U.S. interest rates. In remarks late last week, Fed chair Janet Yellen hinted that the central bank would boost its key rate by the end of the year with the U.S. economy steadily recovering from its weak start to the year. Ms. Yellen will remain in the limelight this week when she testifies on Capitol Hill on American monetary policy. The week ahead also features data on U.S. retail sales and inflation, and central bank meetings in Japan, Canada and the euro zone.

AUD

Substantial savings remained on the table for buyers of the Aussie dollar with the Down Under unit less than a cent away from six-year lows. The outlook for global interest rates remains more supportive of the U.S. dollar than the Aussie, with the U.S. central bank on track to boost rates while Australia’s may have to lower its lending rate further to safeguard the economy from weakness in top trade partner China.

USD

The dollar pushed higher as Greece’s bailout agreement tamped down on global uncertainty, removing a potential roadblock to a U.S. rate hike this year. Of critical focus for the dollar this week will be Fed chair testimony on Capitol Hill on Wednesday and Thursday, and news on U.S. retail sales (Tuesday) and Friday data on consumer inflation.

CAD

The loonie kept within a fraction of a cent away from threemonth lows ahead of major events north of the border this week. Canada’s central bank mulls an interest rate decision on Wednesday, followed by critical inflation data on Friday. Official forecasts expect the Bank of Canada to hold its main rate unchanged at 0.75%. A surprise rate cut or any dovish tone from the BOC or the inflation data could see the loonie revisit six-year lows touched in March.

EUR

After an initial gain on word that Greece had reached a deal on a third bailout with its creditors, the euro was back under pressure as market attention returned to another leading narrative: Expectations the Fed later this year would boost interest rates. Greece struck a deal to receive as much as €86 billion to help it shore up its beleaguered banking sector and allow the government to keep solvent. Providing Greece can implement its promised reforms, the deal should help to markedly tamp down on uncertainty in Europe. Doing so though would leave the euro vulnerable since it returns the focus to global fundamentals, a source of weakness for the single currency. Key data this week include Germany’s ZEW survey of investor confidence on Tuesday, with forecasts pointing to a fourth decline in as many months, and an ECB decision and press conference on Thursday.

GBP

A big gain for the pound against the euro helped sterling eke out a rise against the dollar. The pound’s buoyant start to the week will be tested in critical U.K. data Tuesday on inflation, expected to slow to zero in June from a barely perceptible rise of 0.1% in May. U.K. unemployment on Wednesday is expected to hold steady at 5.5% for May. Also of critical interest will be British wage growth data, also due Wednesday and expected to rise.


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