Currency Market Analysis

Jul 30, 2015 | Currency Market Analysis

Global Themes

The U.S. dollar held firm and hopped into positive territory on the week, with sentiment heartened by the Federal Reserve’s generally upbeat assessment of the world’s top economy. Although the Fed appears undecided on when it would raise interest rates for the first time in almost a decade, market confidence is running high it would happen before year-end. Going forward, good news on U.S. growth, jobs and inflation would bring out the hawkish undertones of the Fed’s statement this week and strength the case for a September rate hike, buoying the dollar. However, subpar news on the economy would highlight the statement’s dovish side and curb strength in the dollar by suggesting a later liftoff. A rate hike would put an arrow back in the Fed’s quiver and give it stimulus ammunition should it need it down the road. Look for the U.S. rate debate to be stirred anew in big data today on Q2 growth and weekly jobless claims.


The dollar had a muted reaction to a generally decent set of U.S. data on growth and jobs. The world’s biggest economy grew at an annual rate of 2.3% in the second quarter, cooler than forecasts of 2.6%, but first quarter growth got upgraded to a 0.6% increase which erased earlier estimates of a negative reading (-0.2%). Jobless claims rose 12,000 to 267,000, a few thousand less than expected. The takeaway from today’s data is that U.S fundamentals appear in sturdier shape, keeping the Fed on track to raise rates. However, uncertainty over the timing suggests the pace of dollar strength going forward may resemble more of a tortoise than a hare.


A 2.2% fall in Chinese stocks today coupled with still weak commodity prices kept a heavy weight on the Aussie dollar which held close to 6-year lows. Australia’s shakier fundamental footing keeps the door open to a Reserve Bank rate cut in the months ahead. Australia’s central bank meets next week on Aug. 4.


A pinch of optimism by the Fed in the U.S. economy was enough for the euro to squander its gain on the week against the dollar. The euro tipped into shallow negative territory for the week after the Fed’s statement this week noted ‘solid’ gains in the U.S. job market, a rate hike supportive assessment. The Fed renewed a headwind on the euro by reminding markets of the stark policy divergence between the U.S. and the super easy euro zone.


The loonie drifted weaker after catching a partial break on Wednesday, spurred by a tentative rebound in oil from near 6-month lows. However, bearish sentiment caught up with the loonie after America’s decent first half growth performance contrasted with forecasts that Canada may have spent the first six months of the year in reverse.


The stronger pound swam against the stream and managed a gain against the otherwise firmer greenback. Sterling’s brighter bias appears to have legs since it’s central bank inspired. News of stronger U.K. growth this week added weight to central bank views that interest rates may rise sooner rather than later. Still, sterling isn’t out of the woods with U.K. inflation running low, at zero, which argues for low rate for longer.

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