Currency Market Analysis

Oct 14, 2015 | Currency Market Analysis

Global Themes

The dollar neared one-month lows against the euro and a currency basket as another subpar reading on China’s economy suggested American interest rates would stay put for the foreseeable future. A day after Chinese imports tanked some 20%, inflation cooled to 1.6% in September, down from 2% and below forecasts of 1.8%. The Fed said that weakness abroad led it to keep its key rate unchanged last month, frustrating dollar bulls, several of whom have jumped ship. The dollar is at risk of continuing its descent until the outlook for global growth brightens which could be a while. Sterling soared after U.K. unemployment unexpectedly improved to 5.4%, the lowest in seven years. Skepticism in the Fed raising rates anytime soon buoyed the loonie while back to back days of soggy data from China weighed on the Aussie dollar. A modest gain is on the cards for U.S. retail sales today.


The loonie moved closer to recent 10-week peaks against its U.S. peer, benefiting from lackluster data from the world’s two biggest economies. The loonie could struggle to break out of its confined range ahead of major event risk next week, including a national election Monday and the Bank of Canada on Wednesday.


Subdued readings on inflation and America’s main economic growth engine, the consumer, shoved the dollar to fresh session lows. Retail sales rose a mere 0.1% in September, lighter than forecasts of 0.2% while August got revised to zero from 0.2%. So-called core retail spending unexpectedly fell 0.1%. Evidence of global headwinds blowing harder on the U.S. economy all but casts into next year the timing of a Fed rate hike, reducing the dollar’s appeal and boosting the allure of others like the euro, loonie, Aussie and sterling. 


Fresh signs of weakness in China weighed on the Aussie dollar which held more than a penny below the seven-week high touched earlier in the week against the dollar. The Aussie’s descent lowered the cost of buying A$1 million by more than $10,000.


Sterling’s inflation-induced black eye from Tuesday was markedly less visible as the lowest reading of British unemployment since mid-2008 gave it a shot in the arm. The pound rebounded from 8-month lows against the euro after unemployment fell to 5.4%, the healthiest in seven years, compared to forecasts to stand pat at 5.5%. Wages rose 3.0%, a tad under forecast. Sterling’s labor marketinspired rally shouldn’t get it far, given Britain’s subzero rate of inflation which suggests a U.K. rate hike was at least a year away.


With pessimism on the rise over China’s economy and American interest rates, the euro continued to creep higher, nearing a one-month best against the dollar. The weak shape of euro zone fundamentals suggests the single currency is skating on thin ice. Keeping pressure on the ECB to ease policy, euro zone factory output contracted for the third time in four months in August.

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