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Currency Market Analysis

Aug 31, 2015 | Currency Market Analysis

Global Themes

The U.S. dollar was modestly subdued on the final day of August, as global stock losses weighed on risk sentiment. Trading conditions were lighter with U.K. markets closed for a public holiday. The mood of the market was cautious, favoring currencies like the euro and yen, after a top Fed official last week suggested America’s central bank could raise interest rates as soon as its next meeting in mid-September. The focus on U.S. interest rates should help limit losses for the dollar which would stand to appreciate once the Fed moves to normalize monetary policy. The chief focus of the week ahead will be America’s jobs report on Friday. Another month of strong hiring would further stir the U.S. rate debate and keep the dollar biased higher over the longer run. 

EUR

Oil prices also fell to a new six year low last week, worsening the outlook for inflation globally. Today, Euro Zone inflation data at 11:00CET is expected to show a drop from 0.2 percent (y/y) to 0.1 percent.

The ECB will announce its latest monetary policy decision on Thursday this week and President Draghi could issue new dovish Euro-negative comments because of the Euro’s sudden appreciation against the US dollar and the drop in oil prices.

Since the Euro’s spike to a 7-month high on August 24, the EUR/USD exchange rate has declined 4.2 percent as China cut interest rates to boost market confidence.

USD

The US currency has appreciated sharply in recent days against the Euro, Pound and Franc, bouncing back quickly from its major sell-off on August 24 as markets gear up for Payrolls Friday this week – the last major employment report before the Fed’s interest rate decision on September 17.

Last week the odds of a US rate hike next month, according to financial market indicators, fell to about 20 percent following China’s sell-off. However, over the weekend several US policymakers spoke about the US outlook, with one member saying the odds of a September hike is around 50 percent.

Several major US economic reports are due out this week, with manufacturing data on Tuesday and news on exports Thursday before Friday’s all-important US Payrolls employment report.

CHF

The Swiss franc last week suffered one of its most volatile 5-day periods since January, back when the SNB unexpectedly removed its Euro-franc peg. Since rallying to its best levels against the US dollar since June 2015 last Monday, the franc has had more than 4 percent wiped off its value.

Speaking over the weekend, SNB Chairman Thomas Jordan said Switzerland’s negative interest rate policy will remain in place for some and will continue to weaken the overvalued franc. Jordan is scheduled to speak again on Tuesday at 18:00CET.


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