Currency Market Analysis

Oct 20, 2015 | Currency Market Analysis

Global Themes

The U.S. dollar edged below its best levels in more than a week, illustrating how meaningful gains remained elusive given the fuzzy outlook for Federal Reserve policy. Expectations for the European Central Bank to boost stimulus as early as Thursday waned in remarks from a top central banker which helped the euro stabilize above 10-day lows against the dollar. Governing council official Christian Noyer said this week that no changes were warranted for the ECB’s €60 billion-a-month economy-boosting bond purchases. Still, the ECB could use its gathering this week to at least set the stage for stronger policies with inflation back in the red. Justin Trudeau’s decisive election victory to be Canada’s next Prime Minister buoyed the loonie as his parliamentary majority helped to minimize any resulting political uncertainty. Largely sanguine minutes from the RBA underpinned the Aussie dollar.


Sterling drifted higher against the dollar with sentiment on the mend after late week remarks last week from a U.K. central banker who suggested area borrowing rates could rise ahead of current market pricing of about a year from now. Talk of higher U.K. rates remains a tough sell for markets, particularly with inflation back below zero and further away from the bank’s 2% goal. 


Not much in the latest RBA minutes to fuel expectations of an imminent cut in the cash rate from 2% buoyed the Aussie dollar. The minutes from the October gathering played up a broadening in the recovery. News that China fared better in the third quarter than many had feared also can tamp down pressure on the RBA to cut rates at its next meeting on Nov. 3. 


The dollar remained largely leash-bound amid elevated uncertainty over when the Fed would boost interest rates for the first time in nearly a decade. Developments over the past week have rejuvenated the case for the Fed to move before year-end which helped the dollar claw back from seven-week lows. Weekly jobless claims are running at multi-decade lows, core inflation rose while China’s 6.9% pace of growth last quarter tempered global slowdown fears. 


Liberal Justin Trudeau’s decisive election win over Conservative Stephen Harper to be Canada’s next Prime Minister caught the eye of loonie bulls. The resounding parliamentary majority, with Liberals on pace to claim at least 184 out of 338 seats, means the prime minister-elect won’t have to rely on other parties to lead, which can keep loonienegative political uncertainty in check. With the election in the rearview mirror, will it allow the Bank of Canada, which renders a decision tomorrow, to cut rates to nurture an economy that remains weak after experiencing a mild recession over the first five months of the year?


The euro stabilized but kept closer to 10-day lows than recent seven-week peaks against its U.S. peer. Comments from an ECB official suggested the central bank would not beef up stimulus when it renders a policy decision on Thursday. Nevertheless, bankers could use the occasion to undercut some of the euro’s recent buoyancy which doesn’t help the bloc’s battle against chronically weak inflation.

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