Currency Market Analysis

Aug 12, 2015 | Currency Market Analysis

Global Themes

A muddied outlook for U.S. interest rates weighed on the dollar and toppled it from two-month peaks against the yen. The dollar slipped against most peers and hit its weakest in a month against the euro. America’s currency wasn’t the only one on the defensive as China’s unit continued to carve out new multi-year lows in the wake of this week’s surprise about-face by Beijing on currency policy. China devalued its currency, putting it on a slightly longer leash, a step toward reforming its tightly managed currency. Markets interpreted the move as a sign that China’s economy might be in worse shape than thought which has rattled markets and sparked demand for safe haven assets. Consequently, U.S. Treasury yields have fallen, reducing the dollar’s appeal. With global uncertainty on the rise, it has fanned skepticism in the Federal Reserve boosting interest rates this year, putting a headwind on the dollar.


Uncertainty over when the Fed would boost rates and a near certainty that Greece would soon get its hands on a third bailout helped the euro to its highest level in a month against the dollar. Greece’s bailout is now in the hands of its parliament who is expected to soon vote on the measure. Short run sentiment has improved for the euro but its longer run outlook remains questionable after area industrial production fell 0.4 percent for a second month in a row.


Lackluster news on Britain’s job market weighed on sterling and kept a U.K. rate hike off the table for the foreseeable future. The pound fell to one-month lows against the euro after area wages underwhelmed with a 2.4 percent rise in June, the slowest pace in three months. As expected, unemployment held at 5.6 percent. The pound fared a little better against the weaker dollar which helped brake its fall.


China’s shock currency devaluation this week and the concerns its raised about the health of the world economy knocked the Aussie dollar overnight to new six-year lows. But the Aussie recovered on the back of the weaker U.S. currency whose decline helped commodities find a tentative footing. The outlook remains poor for currencies with close ties to commodities and China, factors that could stiffen headwinds on growth and lead to further interest rate cuts.


The loonie’s roller coaster week persisted, making for an excellent market for customers to leave orders to attain desired levels. Weakness in the big dollar to the south helped commodities such as oil find a tentative footing, supporting resource-correlated currencies like Canada’s. The loonie followed up its 1 percent gain on Monday, its best daily showing all summer, with a 1 percent loss on Tuesday, its worst single-day performance in about a month. The outlook remains precarious at best for the loonie with oil near six-year lows.


Advantage: December? Skepticism in a Fed rate hike in September has reopened a wound for the dollar. The dollar’s pullback this week largely stems from China’s currency devaluation. The weaker yuan puts upward pressure on the buck. And a strong dollar has proven bad for the U.S. economy by weighing on growth and inflation. A still elevated chance of a September rate hike should help limit downside for the dollar. Renewed strength could be around the corner for the dollar with improvement expected for U.S. retail sales on Thursday.

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