Currency Market Analysis

Oct 27, 2015 | Currency Market Analysis

Global Themes

The U.S. dollar was mixed ahead of the last batch of U.S. data before the Federal Reserve renders an important policy update tomorrow. The dollar’s central bank-inspired rally of last week that powered it to two-month peaks against the euro stalled after lousy U.S. housing figures Monday put a fork in expectations the Fed would leave interest rates unchanged Wednesday. New home sales undershot expectations by a longshot, plunging 11.5 percent in September for the weakest reading in ten months. The report was the latest to underscore the unevenness of the U.S. economy, suggesting a Fed rate hike could be several months away. Slower U.K. growth last quarter weighed on the pound and added to global uncertainty which put markets in a riskaverse mood, buoying safe harbors like the yen. Weaker oil below $44 pressured the Canadian dollar. U.S. durable goods and consumer confidence are due out today.


The pound descended after news that growth in Europe’s third biggest economy slowed more than expected in the third quarter, dealing a blow to sterling and hopes of an earlier U.K. interest rate hike. Britain’s economy slowed to a 0.5 percent rate last quarter from 0.7 percent, below forecasts of 0.6 percent. Decelerating growth and inflation in Britain add weight to expectations the Bank of England could be a year or more away from boosting rates from record lows of 0.50 percent.


Uncertainty over the outcome of the Fed’s meeting this week and its impact on the dollar helped the euro steady above ten-week lows against the dollar. Weak fundamentals and an easier-leaning ECB have the euro built for underperformance over the foreseeable future. But for the buck to get the most bang out of its upside, the Fed would need to make good on its conditional pledge to hike interest rates before year-end, something that looks less tenable given the uptick in uncertainty at home and abroad.


The Aussie dollar steadied with its upside capped for now by mostly weaker global equities which satiated investor appetite risk and higher yields, like the Aussie whose 2.0 percent base rate lays claim to the developed world’s second juiciest. Big risk events could add pressure on the Aussie with domestic inflation due Wednesday and forecast to ebb on a quarterly basis, while the nation’s central bank renders a policy decision on Nov. 3. Lower inflation would increase the chance of the RBA cutting rates as soon as next week.


The Canadian dollar hit a new Oct 2 low against its U.S. counterpart, pressured by risk-off sentiment with most global stocks in the red, and another decline in oil which slipped below $44. The loonie’s descent appears to have its central bank’s backing after officials last week lowered their outlook for growth over coming years. A weaker currency can be a boon for exportgeared economies like Canada’s.


Weak durable goods and downward revisions to the previous report signaled a red light for the Fed on raising rates anytime soon which caused the buck to part with more of its recent gains. Durable goods fell 1.2 percent in September following a 3.0 percent fall in August. The gauge of business spending unexpectedly fell 0.3 percent following a 1.6 percent decline in August. The data suggest the strong dollar and global headwinds are blowing harder on the economy. The Fed decision is due Wednesday at 2 p.m. ET. No post-meeting press briefing from the chair this time.

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