Currency Market Analysis

Oct 06, 2015 | Currency Market Analysis

Global Themes

The dollar remained on a delicate footing amid renewed doubts about the strength of the U.S. economy. The dollar has struggled to keep afloat after data last week showed a marked slowdown in hiring over the last two months. Consequently, market conviction has waned for the Federal Reserve to raise interest rates before the end of the year, leaving the dollar vulnerable. Moreover, signs of a moderating U.S. economy have shown up in recent numbers on manufacturing and services growth. Meanwhile, U.S. trade figures, due out today, are expected to show a plumper deficit, auguring negatively for growth last quarter. The questionable case for the Fed to lift borrowing rates anytime soon would cap dollar gains. But with the Fed perceived to have the most hawkish outlook around for lending rates, downside should also prove somewhat limited.


The rebounding Aussie dollar notched two-week highs against the greenback after its central bank left interest rates unchanged at 2%, and its mum forward guidance hinted that borrowing rates may be at or near a bottom. The Aussie remains near rock-bottom levels for buyers, having weakened more than a dime since the beginning of the year. Affordability has waned and could continue to do so if markets grow more skeptical in a Fed rate hike before year-end, the previous base case.


A sense that U.S. fundamentals aren’t as rosy has helped the euro flash some resilience against the dollar. Last week’s subpar U.S. jobs report has taken air out of the dollar’s sails to the benefit of the euro. Still, gains for the euro are likely to prove the short-lived variety, particularly after data today showed a surprise 1.8% decline in German industrial orders in August, keeping pressure on the ECB to act.


The loonie did a U-turn after notching 2½ week highs overnight after lousy trade data reaffirmed the weak shape of the world’s No. 11 economy. Canada’s trade gap swelled to C$2.53 billion in August, more than double forecasts of a C$1.2 billion shortfall. Exports were down a chunky 3.6% while imports rose modestly. The data hinted at persistent struggles for an economy that contracted over the first half of the year, suggesting area interest rates have yet to hit bottom.


Fresh evidence of a moderating U.S. economy kept the dollar on a fragile footing and a Fed rate hike seemingly off the immediate horizon. America reported the plumpest trade gap in five months with the deficit swelling to $48.3 billion in August, reflecting a weaker global economy, from below $42 billion in July. The bigger deficit suggests Q3 growth downshifted from Q2’s robust annual rate of 3.9%.


Sterling kept its chin just above a five-month trough against the dollar, with U.K. fundamentals also coming under fire of late. The pound has been on the descent as weaker data on inflation, manufacturing and services growth have punted deeper into 2016 markets’ perceived arrival of higher U.K. lending rates. The Bank of England next meets Thursday.

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