Currency Market Analysis

May 21, 2015 | Currency Market Analysis

Global Themes

Signs of recovery in Europe and a barely ajar door at the Federal Reserve to boost interest rates next month put a brake on the U.S. dollar’s modest winning streak. America’s currency has been in better spirits this week, benefiting from talk the European Central Bank (ECB) may strengthen its already potent stimulus over the coming weeks and renewed signs of life in the world’s biggest economy. The U.S. economy’s lethargic start to the year had weighed on the dollar and dropped it near four-month lows last week against a currency basket. A reminder of the overall sound shape of Britain’s economy helped sterling outperform its top peers. U.K. retail sales soared 1.2 percent in April which was more than expected and the best showing by consumers in five months. In the euro zone, French business activity grew at a faster pace, although growth in the leading German economy lost a little momentum. Canada’s dollar held near one-month lows on the eve of critical consumer data on Friday. Markets today will get a good cross-sectional view of the U.S. economy with numbers due on jobs, housing and mid-Atlantic manufacturing. Positive prints would be dollar friendly.


The loonie kept on its back foot near one-month lows ahead of local data Friday that’s forecast to show moderation at the consumer level. Consumer inflation is forecast to move further away from the Bank of Canada’s 2 percent goal by easing to an increase of 1 percent in April from 1.2 percent in March. Retail sales are seen up 0.3 percent in March from 1.7 percent in February. The prints will serve as the last meaningful looks at the economy before the country’s central bank announces a policy decision on Wednesday.


Attention yen buyers: Japan’s currency is still near the most affordable levels in two months. The dollar has risen to mid-March highs against the yen as U.S. Treasury yields hold around elevated levels with the 10-year note above 2.20 percent. Juicier yields in the U.S. tend to entice the Japanese investor to shift money abroad which puts upward pressure on the dollar and downward pressure on the yen. No change is expected when the Bank of Japan announces a policy decision tomorrow.


The euro rose above three-week lows against its U.S. counterpart, though shaky underlying sentiment contributed to its fall to two-month lows against sterling. The euro firmed after business activity in France picked up in May. That was heartening news since recovery in the bloc’s No. 2 economy has largely been a laggard. But any support to the euro from the French data shouldn’t get it far as activity in the top German economy ebbed in May. The big weight on the euro this week has been talk the ECB would strengthen its already potent monetary stimulus over the coming weeks to allow it scope to cut back on its policies later in the summer while bond market activity typically slows. Greece’s inability so far to secure badly needed rescue funds has also pressured the single currency.


U.S. jobless claims rose a little more than expected in the latest period but broader gauges of joblessness brightened which augurs better for the dollar. Headline jobless claims rose 10,000 to 274,000 but that marked the 11th week in a row below 300,000, a level under which denotes an improving job market. The less volatile four-week average fell to the fewest in 15 years. The dollar’s bullish revival this week lost a little drive after Fed minutes Wednesday all but doused expectations of a midyear move to boost interest rates. Consensus views expect a Fed rate hike around September. Fed officials will be armed with one more monthly jobs report before deciding what to do with interest rates next month.


Sterling caught a broad pop and strengthened to two-month highs against the euro after U.K. consumers stepped up spending in April, which served as a reminder of the overall sound shape of Europe’s No. 3 economy. The 1.2 percent gain in retail sales was three times stronger than forecasts of a 0.4 percent increase. The U.K. consumer had turned frugal in March when spending contracted 0.7 percent. Sterling remains in a hole on the week against the dollar, still nursing a wound torn open by inflation figures which showed the first negative print in 55 years which reinforced Britain’s low interest rate outlook for the foreseeable future.

Get the daily currency market analysis in your Inbox

Published five days a week, this newsletter provides day-to-day trends and activities affecting the market in easy-to-understand snapshots.