Currency Market Analysis

Aug 24, 2015 | Currency Market Analysis

Global Themes

New week, new lows for the U.S. currency. America’s buck crashed to fresh multimonth lows against its biggest peers as intensifying worries about global growth suggested the last thing on the Fed’s mind right now was a rate hike. The dollar of late has tended to flock with the higher-yielding crowd as the improving U.S. economy has the Fed on track to raise interest rates. With global worries on the rise, it suggests the Fed may opt to wait longer to raise rates, which has diminished a major source of strength for the greenback. The wild, profit-impacting swings in market volatility have been heightened by thinner summer markets when many participants take vacation. A big test of dollar sentiment will arrive late next week when America releases its next monthly jobs report. Expect uncertainty to remain high, however, with panicky markets seemingly more interested in capital preservation than with positive U.S. fundamentals.


The euro has found a big positive in the latest market upheaval that has prompted many to exit profitable trades in the U.S. dollar to cover losses elsewhere. The euro soared to six-month highs against the greenback as heightened worries about global growth sparked a stampede out of risky assets, like carry trades, which were funded using the low-yielding single currency. As long as market turmoil persists, the euro could continue its recent ascent.


Sterling neared a two-month high against its wobbly U.S. counterpart. However, the more toxic market backdrop also left sterling vulnerable as the climate augured easier or lower rate policies from central banks instead of tighter policy like a rate hike. Both the Fed and Bank of England are perceived at the head of the line to raise interest rates. However, central bank rate hikes are seen on hold until order and stability return to global markets. With the flimsier shape of China, this could take a while, leaving the U.S. and U.K. currencies exposed to further downside risk.


BIG SALE! MAJOR PRICE CUT! Though generally weaker, America’s currency soared to NEW SIX-YEAR HIGHS against its Australian rival as deepening worries about the health of Australia’s top trade partner, China, continued to weigh. The breadth of the move lower in the Aussie could soon leave it in line for a short-covering bounce, but it would tend to take a marked reduction in worries about China to do so. Companies can opt for certainty by locking in some of their current exposure at the best market since 2009.


BIG SAVINGS HERE TOO! Oil’s decisive break below $40 intensified the headwinds on the loonie which crashed to 11-year lows against the U.S. dollar. Loonie losses have also been exacerbated by worries about global growth all of which leave Canada’s economy at greater risk of tipping into recession. Consequently, Canada may need to come to the rescue with another rate cut, which would be positive for growth, but negative for the loonie.


Dwindling expectations for the Fed to raise rates this year is at the heart of the dollar’s latest leg lower. Risk-averse market players have taken to cashing out gains on trades that have proven profitable, such as the greenback’s big winning streak over the past year, to cover mounting losses elsewhere, like in stocks. The dollar fell to two-month lows against a currency basket and remains at risk of losing further value as long as the current, fearful market backdrop remains in place. The real test of dollar sentiment will arrive on Sept. 4 when the U.S. releases its next monthly employment report, the final one before the Fed’s next decision on Sept. 17.

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