Currency Market Analysis
Jan 19, 2016 | Currency Market Analysis
Risky assets on Tuesday were treated to a rare rally of late as worries about slowing global growth subsided. For the U.S. dollar, that translated into a general gain, although the U.S. unit lost ground to peers with close ties to the world economy like the Aussie, kiwi and Canadian dollars. Behind the tentative brightening in market morale were the latest growth figures from China, which were not as bad as feared, while inflation in the U.K. crept higher. Traditional safe harbors like the Japanese yen tumbled as traders tested riskier, though higher yielding waters. The world’s No. 2 economy grew at a slower, though still gangbusters rate of 6.8 percent over the final three months of 2015, the coolest in six years. For all of 2015, China’s economy grew 6.9 percent, the slowest in a quarter-century, though solid enough to alleviate fears of a hard landing scenario in which the economy comes to a screeching to a halt.
Low yielders like the euro lost favor as worries over a slowing world economy receded, tempting traders to waded cautiously into higher yielding, riskier assets like the U.S. and Australian dollars. Caution ahead of the European Central Bank’s (ECB's) first decision of the year on Thursday also capped demand for the single currency. The ECB isn’t expected to make any changes this time but it could signal a wide open door to easier action given oil’s massive plunge from above $40 when the bank last met in early December to below $30, a move the puts downward pressure on already feeble inflation.
Sterling sank to March 2009 lows against the dollar as dovish remarks from the head of the Bank of England overwhelmed surprise news of an uptick in U.K. inflation. Inflation unexpectedly rose 0.2 percent annually in December, the highest in nearly a year, from 0.1 percent. But post data remarks from Mark Carney played down prospects of a rate hike anytime soon, dovish remarks that served as fresh sell signals for sterling bears. Moreover, Mr. Carney warned that plunging oil was bad for U.K. inflation, suggesting a ‘very low level for longer.
The Aussie bounced above its weakest in nearly seven years as the latest growth data from China helped allay hard landing fears in China, a scenario in which growth screeches to a halt, and pushes up unemployment. Official data showed China’s economy lost a tick of momentum, growing at a 6.8 percent quarterly pace in October to December, the lowest in six years, from 6.9 percent in the third quarter. Despite the modest slowing in China’s economy, broader worries remain about the breadth of its decline, suggesting today’s risk rally may not have legs.
Canada’s buck firmed above fresh lows Monday, its weakest in about 13 years. Oil started Tuesday with a gain but kept at weak levels under $30. Markets are rife with uncertainty over the Bank of Canada Wednesday. Markets see an elevated risk of a rate cut from 0.50 percent to help stave off another oil-led recession. But the nation’s prime minister this week voiced worry over the falling loonie and oil, suggesting Canada may be careful about saying or doing anything, like cutting rates, to weaken it further.
The dollar fared mixed but mostly stronger as reduced worries about slowing global growth were seen supportive of the case for higher U.S. interest rates this year. This week marks the calm before the Fed next week. Most expect the Fed to hold fire on a rate hike when it announces its first decision of the year on Jan. 27.
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