Global Themes

The U.S. dollar took a step back Tuesday as the eve of major holiday prompted consolidation and profit-taking. The dollar logged its third winning month in June and turned in its best quarter since late 2016 as America’s steadily growing economy allowed the Federal Reserve to raise borrowing rates at a quicker clip than its biggest rivals. The euro firmed as political risk in Europe abated after Germany’s chancellor reached a deal with her conservative counterparts on immigration. Bullish U.K. data boosted sterling along with chances of a local interest rate hike next month. Risk-on sentiment and rallying commodities put a tailwind on the Aussie and Canadian dollars. U.S. markets will be closed Wednesday for America’s Fourth of July holiday. Once back from the midweek break, attention will turn to the release of Fed minutes on Thursday and nonfarm payrolls Friday.


America’s buck drifted lower as it consolidated its best quarter in more than a year while others chose to pull chips off the table ahead of the midweek holiday. Big risk events await the dollar after the holiday. The Fed will release the minutes of its June meeting Thursday and looming Friday is the June U.S. jobs report. The market is somewhat skeptical of the Fed following through with two more rate hike this year given trade and global commerce uncertainties and how the central bank has signaled a willingness to let inflation top its 2% goal for a period. A bullish jobs report which is generally on the cards could give traction to both rate hike bets and a stronger dollar. 


Sterling firmed as positive U.K. data this week corroborated with the view that the British economy’s weak start to the year may have been an outlier. A day after manufacturing growth eclipsed forecasts, the construction sector topped expectations, potentially setting up another data beat Wednesday when the PMI on the all-important and U.K. economy-driving services sector is due. Forecasts call for steady services growth in June. The odds of a Bank of England rate hike to 0.75% from 0.50% on Aug. 2 are about 60%.


Mexico’s peso rallied more than a percent to nearly one-month highs on cautious optimism that the nation’s president-elect, Mr. Lopez Obrador, might be able to reach an elusive deal with the Trump administration on modernizing NAFTA. Emerging markets also benefited from risk-on sentiment with most global equity markets higher.


Canada’s dollar returned from a long holiday weekend perched at mid-June highs, boosted by oil scaling fresh multiyear of nearly $75 a barrel and odds showing an almost 80% likelihood of the Bank of Canada raising rates to 1.50% from 1.25% next week. Next to shape near-term sentiment for USDCAD will be Fed minutes due Thursday and Friday when both the U.S. and Canada release critical jobs data. Forecasts call for Canadian hiring to rebound after a modest two-month losing streak. 


The euro firmed after political risk in big nation Germany abated in a meaningful way. German Chancellor Angela Merkel finally reached an agreement with her conservative lawmakers on immigration, thereby staving off the prospect of early elections. The lift to the euro was modest at best given the list of lingering liabilities such as trade instability with the U.S. and the ECB’s intention to hold rates low for at least another year.

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