Currency Market Analysis

Aug 28, 2015 | Currency Market Analysis

Global Themes

A little softer is how the U.S. dollar started Friday, trimming some of gains over the past three sessions that helped pull it out of its biggest hole in seven months. It’s been a rocky week for the dollar, having hit January lows against the euro and yen on Monday on worries that China was headed for a so-called ‘hard landing,’ market jargon for a steep decline in growth that can push up unemployment. Concerns about the health of one of the world’s largest economies dented the dollar as it suggested the Fed would be less likely to raise interest rates this year. But the dollar has found a helping hand in America’s stronger economy which helped cheer up markets and revive expectations for the Fed to raise rates. Today marks Day 2 of the Fed’s three-day summer summit on global monetary policy. Markets will be all ears for any clues on when U.S. rates might rise. Also in focus Friday will be U.S. reports on consumer spending, inflation and consumer morale.


The semblance of stability that has returned to global markets has many once again using the low-cost euro to fund bets on better yielders, the so-called ‘carry trade.’ The euro hovered around one-week lows, down sharply from seven-month highs notched on Monday when frightful investors ditched risky assets and darted back into the euro. As stability returns to markets, so too will the euro zone’s weak fundamentals, leaving the euro subject to renewed weakness. Major risk events loom next week for the euro: inflation on Monday, unemployment the next day and a meeting of the European Central Bank on Thursday. A dovish message would weigh on the euro.


Excellent value for the GBP buyer with sterling at seven-week lows and on track for its worst week since the spring. The latest global market turmoil has dealt a setback to expectations that area interest rates could rise sooner rather than later. Britain’s central bank governor, Mark Carney, is due to speak at the Fed’s summer summit in Jackson Hole, Wyo. at which he could hint at the outlook for rates. U.K. markets will be closed Monday for a public holiday so whatever Mr. Carney says could result in an exaggerated market reaction. Britain next week releases manufacturing data on Tuesday and critical services growth on Thursday.


Switzerland’s economy unexpectedly dodged recession in the second quarter, reassuring news that rewarded the franc with a rally. The Swiss economy grew 0.2 percent in the spring quarter compared to forecasts to contract for a second straight quarter.


Softer oil prices Friday weighed on the loonie and kept it in close reach of 11-year lows. The loonie had fared better on Thursday after rallying world stock markets and soaring oil prices offered support to the recently battered Canadian currency. The loonie faces a daunting week ahead with quarterly growth due Tuesday and monthly employment on Friday. Should the data confirm a return to recession the loonie would be at heightened risk of accelerated losses as gloomy news would intensify pressure on Canada to cut interest rates.


Caution ahead to remarks from Fed officials that their Jackson Hole summit kept the dollar a little below one-week peaks. Today’s first batch of U.S. data was largely in line with forecasts, not having a major impact on the dollar. Consumer incomes rose 0.4 percent for a third straight month in July while spending rose 0.3 percent for a second consecutive month. A gauge of inflation, the one the Fed watches closely, cooled to 1.2 percent from 1.3 percent. Strong readings on the U.S. economy this week should pave the way to dollar outperformance, providing the market turmoil can meaningfully subside. Next week will be all about America’s jobs report on Friday. Good news would risk a stronger dollar as it could kick open the door to a September rate hike.

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