Currency Market Analysis

Dec 02, 2015 | Currency Market Analysis

Global Themes

America’s dollar firmed toward recent multimonth peaks, benefiting from another subdued inflation survey from the euro zone that cemented expectations for action tomorrow. The dollar, though, is off to a tepid start to December with its rise tempered by lackluster U.S. factory data and baked in expectations for central banks this month. While the ECB is likely to ramp up stimulus to help beat back the persistent threat of economy-squeezing deflation, the Fed appears primed to head on the opposite direction and boost American lending rates. Canada’s loonie softened ahead of a Bank of Canada decision today at 10 a.m. ET. The Fed chair and some of her colleagues speak today. Markets will be all ears for any mention of U.S. interest rates and what the immediate future may hold. After the ECB tomorrow, another colossal risk event looms Friday in America’s monthly jobs report for November.


The euro’s quick start to December waned after area inflation unexpectedly steadied at 0.1 percent annually in November, below forecast and miles from the ECB’s near 2.0 percent bull’s-eye. Near zero inflation put the fork in expectations for the ECB to top-up its stimulus program by slashing interests and/or boosting its monthly bond purchases. Despite the near certainty of action, the euro’s immediate prospects appear anything but certain. Prudent companies today are placing orders to limit any potentially unfavorable move come tomorrow or Friday when America’s jobs report is due.


Excellent bargains on the table for pound buyers with the U.K. currency a fraction of a penny away from Monday’s seven-month low. Back-to-back days of subpar U.K. purchasing managers’ surveys have served as reminders that the door remains shut to a Bank of England interest rate hike. By contrast, America’s central bank appears two weeks away from boosting U.S. borrowing costs, and thus the dollar’s allure, for the first time in nearly 10 years.


The Aussie dollar had its winning streak extended after growth Down Under proved stronger than expected while its second quarter performance got upgraded. Australia’s economy grew 0.9 percent in the third quarter, three times quicker than Q2’s upwardly revised 0.3 percent pace. The data came on the heels of an RBA meeting at which the central bank governor sounded sanguine which played down prospects of further rate cuts.


The loonie was camped near recent lows ahead of today’s 10 a.m. ET interest rate decision from the Bank of Canada. No change to the bank’s 0.50 percent base rate is expected. The meeting follows mixed news this week on the northern economy which although out of recession contracted anew in September. Already on a fragile footing, any dovish tinge from the BOC would risk tipping the loonie to fresh lows.


The dollar firmed on the eve of the ECB but it has stepped down from eight-month highs on a trade-weighted basis. Could the dollar’s strength be harming the U.S. economy all over again? That was the takeaway from poor factory news this week. The Fed is widely expected to raise rates this month but beyond December looks highly uncertain for U.S. monetary policy which could temper the dollar’s buoyancy.

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