Currency Market Analysis

Aug 25, 2015 | Currency Market Analysis

Global Themes

The U.S. dollar recovered from seven-month lows as a tentative calm washed over recently battered global financial markets. Chinese stocks took another plunge but equities in Europe rebounded and Wall Street looked set to bounce after sliding more than 500 points over the last two sessions. Market sentiment perked up today, but remained treacherous, after China announced its fifth interest rate cut since November to help put a floor under its slowing economy. Oil rose but kept below $40 which helped the loonie stabilize above 11-year lows. Easing risk aversion should help America’s dollar but it bullish days would remain on hold until the market regains confidence in the Federal Reserve boosting interest rates. Hopes of a U.S. rate hike next month have all but evaporated out of concern that China’s troubles could damage America’s recovery. The U.S. today releases data on the consumer and new home sales.


The euro weakened a few cents below Monday’s seven-month peak against the U.S. dollar as its main source of strength waned as global markets showed signs of stabilizing. Falling stocks around the world have been a boon for the euro as it has put the market in a risk-averse state of mind, prompting many to buy back the heavily sold single currency which, during calmer times, gets exploited to fund bets on higher-yielders, the so-called carry trade. The euro was little moved by news that Germany’s Ifo survey of corporate confidence unexpectedly brightened to three-month highs in August, buoyed by easing worries over Greece’s debt problems.


Sterling remained buoyant against the dollar, keeping near its strongest in two months. Markets’ about-face on U.S. interest rates, now anticipating a later liftoff, has worked in the pound’s favor. Expect limited upside for sterling though as, like the Fed, Britain’s central bank is less likely to consider a rate hike amid such a tumultuous market backdrop, one that exposes its economy to potential shocks if it’s sustained.


The Aussie dollar firmed two pennies above this week’s 6-year lows after China’s quarter-point interest rate cut to 4.6 percent, the fifth one since November, came as a welcomed relief to recently battered markets. Still, any bounce isn’t likely to carry the Aussie far amid ongoing worries about the health of China’s economy.


Oil stayed volatile but rose to within half a cent of $40 which was enough to offer a reprieve for the commodity-crushed Canadian dollar. The loonie this week plunged to 11-year lows as worries about China’s economic and financial market troubles took a toll on commodities. Canada’s shaky economy should keep its currency biased on its back foot for the foreseeable future, leaving it vulnerable to further weakness.


The dollar was mixed but mostly stronger, rebounding – along with market confidence – from seven-month lows against the euro and a currency basket. The latest China-led uproar in world markets has been a source of both strength and weakness for the dollar. The dollar stands to lose against its biggest peers, like the euro and yen, when global growth fears flare and suggest a later rather than sooner U.S. rate hike. But the remains an oasis of shelter during turbulent times against currencies with the closest ties to China like the Aussie, kiwi and loonie and a host of emerging market currencies. Expect uncertainty and volatility to shadow the dollar until market odds increase for a Fed rate hike.

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