Currency Market Analysis

Sep 09, 2015 | Currency Market Analysis

Global Themes

Hopes that some of the world’s biggest central banks would resort to stronger monetary policies helped fuel another rally for risky stocks and higher yielding currencies. That translated into solid gains for the U.S. dollar against safer and lower yielding currencies like the yen and euro. Expectations the Federal Reserve would boost interest rates in the not too distant future have allowed the dollar to flock with the riskier crowd. Japan helped fuel the latest risk party after its stock market soared more than 7.5 percent after the nation’s premier hinted at more monetary support to buoy the world’s No. 3 economy. More evidence of a moderating U.K. economy weighed on sterling. High-yielding currencies like the kiwi dollar, home to the developed world’s top yield, and the Aussie, which ranks second, outperformed. Canada’s loonie steadied near multiyear lows ahead of a 10 a.m. ET policy announcement from the Bank of Canada.


A party-like atmosphere for global markets and investors’ improved appetites for risk renewed a headwind on the euro which fell broadly. As market confidence brightens it tends to entice people to brave riskier waters and use the low-yielding euro to fund bets on the high yielders like the dollar and its anticipated up and coming yield, and currencies like the Aussie and kiwi, the developed world’s juiciest yielders.


More evidence of a downshifting U.K. economy weighed anew on sterling which tipped toward recent four-month lows against its U.S. peer. Expectations for a U.K. rate hike are on the decline after the nation’s trade gap topped £11 billion in July, the biggest in a year, and industrial output unexpectedly contracted 0.4 percent, doing so for a second straight month.


Hopes that big Asia – the likes of China and Japan – may resort to stronger monetary stimulus unleashed a risk rally that helped propel the high-yielding Aussie dollar above its deepest depths in more than six years. The still uncertain outlook for China’s slowing economy though will keep the Aussie and other commodity currencies on a vulnerable footing for the foreseeable future.


The loonie hovered within a cent of 11-year lows, facing a daunting day ahead in what the Bank of Canada says and does. The loonie could catch a knee jerk lift if Canada’s central bank holds fire on a third rate cut this year which would disappoint the camp betting of further action to dig the economy out of recession. An easy, dovish tone to the bank’s statement could open the door to a move towards C$1.35. The BOC decision is due at 10 a.m. ET.


The dollar trotted with the riskier crowd, rising against the euro and yen while it made gains against sterling. The dollar though has settled into somewhat of a confined range as the market waits on the Fed to render its big decision next week. Gains have been tougher to sustain for the dollar of late on the notion that even after nearly a decade it may still be too soon for the Fed to raise interest rates given risks to growth from stubbornly low inflation, China’s slowdown and turbulent markets. But if global markets can keep from plunging between now and Sept. 17, it could clear the way for the Fed to raise rates which would leave the dollar ripe for a big bounce.

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