Currency Market Analysis

May 29, 2015 | Currency Market Analysis

Global Themes

The U.S. dollar surrendered some ground Friday but was well on its way to a winning week and month. Sentiment brightened for the U.S. currency over the latter part of May as the economy produced better data and top Federal Reserve officials held steadfast to predictions that American interest rates would turn higher this year. The dollar Friday took a few paces back from one-month highs overall and some dozen years against the yen after a Japanese official pushed back against the yen’s renewed descent. Japan’s finance chief dubbed the yen’s recent performance as “rough” and said that he would “closely monitor market moves.” A big day ahead awaits the U.S. economy with revised estimates of first quarter growth due along with data on Midwest manufacturing and consumer sentiment. Another shift into reverse is on the cards for U.S.  first quarter growth. But any blow to the dollar from a weak growth report could be offset by later session data on factories and consumers, particularly if they should highlight how the economy already appears to be on the mend. Canada’s loonie rebounded from six-week lows with its session fate tethered to local growth data.


The euro pushed above one-month lows against the greenback, benefiting from month-end book balancing and hopes that Greece would eventually secure much needed rescue cash to keep fiscally afloat and a member of the euro bloc. The euro’s tentative bounce Friday helped it pare losses on the week and month. The euro could strengthen further if and when Greece wins more rescue cash. However, Europe’s still shaky economic prospects and low rate policies contrast the picture in the U.S. where interest rates appear on course to rise over coming months. Critical data looms next week for the euro with inflation expected to improve to 0.2 percent in May from zero in April while the bloc’s jobless rate is expected to fall a notch to 11.2 percent in April.


A surprisingly poor start to the year for Canada’s economy weighed on the loonie and lobbed it back toward six-week lows. The northern economy slammed on the brakes in Q1 when growth contracted 0.6 percent annually from a 2.2 percent rate of growth in Q4. Canada’s economy was expected to grow 0.3 percent last quarter. A number this poor reinforces Canada’s low rate outlook for the foreseeable future which differs from expectations for U.S. rates to move higher. Next week brings crucial Canadian trade data on Wednesday and the all-important employment report on Friday.


The yen may have recovered slightly from 12-year lows, but it remains at highly affordable levels for JPY buyers. The yen got escorted away from late 2002 lows after Japan’s finance chief took some exception to its renewed descent. Overnight data from Japan depicted the world’s No. 3 economy on mixed but still wobbly footing. Inflation slowed to 0.3 percent from 2.2 percent but factory output rebounded with a 1 percent gain which erased a 0.8 percent decline last time.


The dollar pared session losses after U.S. growth fared a little better than expected. The world’s top economy shrank 0.7 percent annually in the first quarter which was a notch better than forecasts of -0.8 percent. Weather related factors were partly behind the economy’s underwhelming performance. What matters most for markets is the perceived road ahead for the U.S. economy rather than the look in the rearview mirror. The U.S. economy already appears in better shape following news this week of healthy business spending and an uptick in consumer confidence. The dollar faces a huge initial week of June with America’s influential jobs report due Friday and forecast to show an increase of 227,000 a few thousand more than last time.


Sterling-denominated bills are markedly more affordable now than a mere two weeks ago. Sterling has depreciated more than five cents over that span, amounting to meaningful savings for customers that astutely choose to pay their invoices in the U.K. currency. Driving the pound lower and the dollar higher have been markets second thoughts about the health of the U.K. economy and strengthening conviction for U.S. interest rates to rise this year. The opening week of June features British manufacturing and services growth on Monday and Wednesday, respectively, and a Bank of England policy announcement on Thursday at which area interest rates are expected to stay put at record lows of 0.50 percent.

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