Currency Market Analysis

Sep 03, 2015 | Currency Market Analysis

Global Themes

With China’s volatile stock market on holiday for the rest of the week, the U.S. dollar and its biggest peers got off to a mostly tranquil start Thursday. Market activity was also light ahead of today’s policy update from the European Central Bank. Cautious also reigned in the run up to America’s employment report Friday, seen as a potential catalyst for the Federal Reserve to raise interest rates. The market has dovish expectations for the ECB, given the rise in worries over global growth and the steady fall in commodity prices, risks that run counter to the central bank’s bid to resuscitate low inflation. Any show of concern or a willingness to beef up already potent policies would risk a new leg lower for the euro. Fresh evidence of a slowing U.K. economy kept the pound near three-month lows. Canada’s dollar steadied around 11-year lows ahead of North American trade data and U.S. jobless claims.


The euro tumbled after Mr. Draghi let the doves loose. The ECB president acknowledged downside risks to growth and inflation from global weakness and plunging commodities, factors that stand in the way of a robust recovery. The central bank chief also said the bank could expand its QE program beyond its planned expiry a year from now. Mr. Draghi’s’ concerned tone with regard to the risks facing the bloc’s economy underscored the divergent outlook for policy compared to the Fed which is on course to raise interest rates. Mr. Draghi’s dovish tone removed a pillar of resilience for the euro, leaving it vulnerable to further falls.


Sterling plumbed new 12-week lows amid mounting evidence of a slowing U.K. economy, keeping rate hike expectations on ice. Britain’s services industry, a leading growth engine, unexpectedly slowed to the weakest in 27 months with its purchasing managers’ index ebbing to 55.6 in August, two points under forecasts. Recent numbers on Europe’s third biggest economy suggest growth downshifted in the third quarter, dealing a blow to expectations of a rate hike anytime soon.


China’s break for the rest of the week so far hasn’t translated into a holiday or reprieve for the heavily sold Aussie dollar. The Aussie kept on the defensive at six-year lows after data showed the nation’s consumers unexpectedly refrained from spending in July with retail sales down 0.1% which ran counter to forecasts of a 0.4 percent increase.


Sounding optimistic on the outlook for the Swedish economy and keeping its base rate unchanged at -0.35 percent, Sweden’s central bank helped ignite a broad rally for the crown which soared to one- and six-week highs against the dollar and euro, respectively.


The loonie remained pinned near 11-year lows despite constructive news on Canadian trade. Canada’s trade gap shrank to C$593 million in July, down from a shortfall of C$810 million in June and less than half of forecasts of a C$1.3 billion deficit. The data wasn’t enough to allay deeply bearish sentiment with softer oil prices around $46 keeping a headwind on the loonie.


A batch of overall constructive U.S. data helped add to the dollar’s Draghi-inspired rally. Jobless claims jumped more than expected to 282,000, but held in a healthy range below 300,000 for a 26th straight week. America’s trade gap narrowed to $41.9 billion in July from $45.1. The smaller shortfall bodes well for Q3 growth.

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