Currency Market Analysis

Sep 08, 2015 | Currency Market Analysis

Global Themes

U.S. and Canadian currency traders emerged from the long holiday weekend with an appetite for risk which helped the greenback edge higher against the euro and yen. Against the loonie, however, the U.S. dollar lost modest ground. The market pulse was a somewhat stronger one on Tuesday thanks to news of a smaller than expected contraction in Japan’s economy last quarter, the world’s third biggest, and Germany’s improved trade position. Still, questions about global growth remain after Chinese imports fell for a tenth month in a row, highlighting ongoing fragility in the world’s No. 2 economy. Uncertainty continues to shadow America’s currency, limiting both upside and downside. Mixed jobs data last week failed to cement expectations for the U.S. central bank to finally boost interest rates when it gathers next week. Top focus in North America this week will be a Canadian policy meeting tomorrow.


The euro received somewhat of a counterintuitive blow from better news on German trade. The bloc’s biggest economy’s trade position was literally swell in July as the surplus ballooned to €22.8 billion from €22.1 billion. The report helped quell worries about faltering global growth, buoying higher yielding risky assets at the expense of lower yielding funding currencies like the euro. Global stock gains and heartier risky appetite are among the euro’s biggest nemesis these days, along with the European Central Banks (ECB’s) still-open door to stronger stimulus to keep the recovery on track.


Sterling recovered from four-month lows against the dollar, buoyed by a pickup in risk sentiment and reports of hefty M&A flows. A Japanese insurer reportedly will pay a £3.5 billion price tag to acquire a U.K. insurance company. The news helped mask bearish sentiment for the pound stemming from renewed uncertainty about the shape of Britain’s economy.


While North American markets were closed Monday for holidays on both sides of the border, the Aussie dollar plunged to new six-year lows. The Aussie’s decline was hastened by news of the dimmest confidence among Australian companies in two years which underscored threats to growth from a slowing Chinese economy. But on Tuesday, the Aussie had pared its decline as most global stocks rose, including in China, which buoyed higher yielders such as the Aussie. Across the sea this week, New Zealand’s central bank is expected to cut its official cash rate to 2.75 percent from 3.0 percent to help ward off the risks of collapsing commodities and weakness in China. Ahead of Thursday’s Reserve Bank of New Zealand (RBNZ) rate decision, the kiwi dollar hovered at six-year lows.


The loonie emerged from the holiday weekend with a gain, a sign that markets think Canada’s central bank would hold off on a rate cut this week. A rate cut seems off the table for now after data last week showed a smaller trade gap and a surprise explosion of hiring. The Bank of Canada renders a decision on Wednesday with the tone of its statement looming as a chief threat to the loonie’s value should officials signal a readiness to cut rates further to help stabilize its recession-weary economy.


Skepticism the Fed would raise interest rates next week has put a lid on the dollar’s short run upside. However, a still too close to call outcome by the Fed on Sept. 17 should help limit losses for the dollar. Offering a catalyst of confusion, the gain of 173,000 jobs last month was the lightest in five while the dip in the jobless rate to 5.1 percent was the best in seven years. Little meaningful U.S. data before the Fed puts dollar sentiment squarely in the hands of the central bank’s decision.

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