Currency Market Analysis

Jul 17, 2015 | Currency Market Analysis

Global Themes

Reduced uncertainty over Greece and a near certainty for a U.S. rate rise this year had the American dollar on track for its best week in months. The dollar appears closer to reclaiming its only game in town status after Greece and its lenders struck a preliminary deal on a bailout. Greece’s tentative shift to the back burner has markets back in a global fundamentals frame of mind. America’s sturdier economic prospects depict the Fed in the lead among major central banks in boosting interest rates, a narrative that fueled the dollar’s historic run to 12-year highs in March. The dollar’s outlook has brightened but upside this time could prove somewhat more restricted given that the market has largely priced in higher U.S. lending rates while the economy continues to produce uneven data. The dollar was up 1.5 percent for the week against a currency basket ahead of U.S. data today on inflation, housing and the consumer.


Aussie dollar buyers enjoyed the best levels the market had to offer in six years. The headwinds on the Aussie are daunting ones and augur further depreciation over the short run. Sources of weakness include: falling commodities, persistent unease over the health of China’s economy, Australia’s most important trade partner, and a Fed rate hike coming into sharper focus. Aussie inflation data on July 22 will be critical to the outlook for local interest rates.


The dollar was on track for its best week in two months, rising 1.5 percent on a trade-weighted basis. Better news on inflation and housing kept the focus on the Fed and strengthened the case for a rate hike this year. Core inflation rose 1.8 percent annually in June from 1.7 percent. Housing fared better than expected with housing starts up 9.8 percent and building permits, a gauge of future activity, up 7.4 percent. Consumer sentiment at 10 a.m. ET is expected to steady at multimonth highs.


The euro plunged to seven-week lows this week, depreciating more than two cents in the process. Reduced, though still elevated, worries about Greece allowed markets to refocus on global fundamentals, a source of negativity for the single currency whose economy is still in need of the ECB’s super low rate policies. Thanks to a bump in emergency credit from the ECB, Greek banks are expected to reopen next week after a three-week closure to ward off a banking sector collapse.


Inflation north of the border inched higher but should do little to arrest the loonie’s fall to six-year lows. Consumer prices rose 1 percent annually in June, reaching the bottom of the Bank of Canada’s 1-3 percent range, from 0.9 percent in May. The loonie remains at risk of accelerated deprecation after Canada cut rates this week and said the economy would be slower to rebound.


Who will be first to raise interest rates: the U.S. or Britain? The uncertainty enabled the pound outperform even its otherwise buoyant U.S. counterpart. Britain’s central bank this week served notice to markets that area interest rates could rise a bit sooner, given the U.K. economy’s relatively sound shape. Next to drive the pound and stir the U.K. rate debate will be central bank minutes on July 22, followed by retail sales the next day.

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