Currency Market Analysis

Jul 28, 2015 | Currency Market Analysis

Global Themes

With the Federal Reserve a little more than 24 hours away from rendering another market-impacting policy statement, the U.S. dollar recovered from multiweek lows against the euro and yen. A risk-off start to the week had caused the U.S. currency to slip to two-week lows against its biggest peers as worries intensified about slowing growth abroad while Chinese stocks sank more than 8 percent for their worst day in eight years. With the Fed poised to raise interest rates this year, the dollar lately has tended to associate with riskier assets and come under pressure when market confidence falters. The week’s main event, the Fed, should catalyze the dollar for weeks to come. The Fed is due to release its statement Wednesday around 2 p.m. ET. A hawkish message that keeps in play a September rate hike would be bullish for the dollar. But a Fed nod to global uncertainty would be dovish and weigh on the dollar.


Faster U.K. growth last quarter helped the pound outperform its rivals. As expected, Britain’s economy grew 0.7 percent in the second quarter, nearly twice the 0.4 percent pace in the first quarter. Britain’s better performing economy bolstered bets the Bank of England could raise interest rates in the months ahead. But a sense the Fed would win any footrace against the BOE to lift rates should cap sterling gains against the dollar.


Like it largely has of late, the euro continued its up one day, down the next trading pattern against the dollar. A day after it had notched two-week peaks, the euro surrendered ground. The euro had risen to mid-July highs Monday after German business confidence unexpectedly brightened in July, suggesting Europe’s biggest economy was weathering uncertainty related to Greece. A focus on the Fed worked in the dollar’s favor and highlighted how U.S. rates stand to rise while European policies are expected to remain ultra-loose.


The Aussie dollar stabilized from six-year lows but remained on highly volatile ground. Chinese stocks followed up Monday’s 8.5 percent rout, the worst day in eight years, with a loss of 1.7 percent. The Aussie’s monthslong descent remains firmly in place, given elevated worries about slowing growth in China while the rate hike leaning Fed stands to narrow Australia’s interest rate advantage.


The loonie kept to a confined range and not far from decade-plus lows against the dollar following news on Canadian wholesale inflation. Producer prices slowed to a fall of 0.9 percent annually in June from a 1.3 percent decline in May, keeping at benign levels that justified Canada’s recent rate cut. Worries about slower Canadian and global growth, coupled with falling oil prices, should keep the loonie biased on its back foot.


The Fed in the spotlight today and tomorrow helped dig the dollar out of its biggest hole in two weeks. Upside for the dollar has been a challenge of late as weakness abroad augur a later rather than sooner timing of a Fed rate hike. Markets hope to glean clarity on the rate outlook in the Fed’s statement, due Wednesday around 2 p.m. ET. Consumer confidence, due today at 10 a.m. ET, is expected to slow to 100 from 101.4, a level still consistent with solid growth.

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