Currency Market Analysis

Jan 21, 2016 | Currency Market Analysis

Global Themes

The U.S. dollar steadied against most peers with the currency market today looking to an update from the European Central Bank (ECB) on interest rates and a pair of reports on the U.S. economy for direction. Though broadly steady, the dollar notched new seven-year highs against the U.K. pound, one of the year’s worst performers, and moved below 13-year peaks against the Canadian dollar. Underlying market sentiment remained woozy, keeping safe harbors like the yen well-supported and in reach of one-year highs against the greenback. Markets can’t seem to shake for long their persistent concerns about weakening global growth and plunging oil prices. The latest financial market turmoil has made for an uncertain U.S. economic backdrop, boding a slower pace of U.S. interest rate hikes, and clouding an otherwise bright outlook for the American dollar.  


The euro was initially little changed after the ECB announced no change to its key lending rates, leaving its main one at 0.05 percent and the deposit rate for banks at minus 0.3 percent. But the euro tanked on dovish talk from ECB President Mario Draghi whose concerned tone on global developments and the impact in amenic inflation kicked the door open to stronger stimulus as soon as the bank’s next meeting on March 10.


The Aussie dollar stabilized above seven-year lows but remained on a slippery surface given underlying worries about global growth and tumbling commodity prices, concerns that keep the door ajar to Aussie-negative interest rate cuts from 2.0 percent in the months ahead. Key to Australia’s interest rate outlook will be local inflation data for the fourth quarter, due on Jan. 27.


The dollar weathered a weak batch of U.S. data and instead shot higher after a dovish sounding ECB chief dropped strong hints of possible action as soon as the bank’s next meeting in March which shined a brighter spotlight on the dollar’s big advantage: Divergent monetary policies between the U.S. and Europe. Showing the U.S. isn’t immune to global headwinds, jobless claims rose to six-month highs while the Philly Fed index of Mid-Atlantic manufacturing contracted anew. The reports extended a stretch of subdued data, depicting the Fed sidelined for now on interest rates, diminishing the dollar’s big positive.


Sterling clocked new seven-year lows, extending a rout of more than 10 cents in value since December. Sterling’s swift descent has translated into huge savings for U.S. importers who can lock in juicier profits today. The forces working against the pound are significant: U.K. interest rates aren’t expected to rise for a long time, the oil slide is negative for near zero inflation, and pound-negative uncertainty over Britain’s future in the European Union.


The loonie held tightly to the lifeline the Bank of Canada (BOC) threw it Wednesday when the central bank decided against cutting interest rates from 0.5 percent. With few arrows left in its quiver, the BOC stood pat on policy which helped dial back negative sentiment toward the loonie. The loonie’s edging above 13-year lows opened a window of opportunity for loonie sellers, one that could close quickly given the loonie’s bearish underlying bias.

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