Currency Market Analysis

Jun 17, 2015 | Currency Market Analysis

Global Themes

Fed Day found the U.S. currency mixed but mostly softer as markets braced for an update from America’s central bank at 2 p.m. ET. Central banks and the outlook for their policies have been the main driver of currencies so today’s announcement from the Fed could rouse markets and kick already elevated levels of volatility a little higher. It’s unclear how the dollar will take today’s news from the Fed as partially baked into its value is an expectation for America’s central bank to boost interest rates sometime over the latter half of the year, with many eyeing September if the economy keeps on an improving path. Consequently, the immediate outlook augurs heightened uncertainty for the dollar. Still, many remain bullish and upbeat about the dollar’s longer run prospects since central banks in Europe and Japan are not expected to follow in the Fed’s footsteps of tighter, higher interest rate policy for a while yet. The Swiss franc neared one-month highs as markets sought a safe haven hideout from Greek turmoil. A better week for Britain’s economy and the pound’s status as a haven helped the U.K. unit to its strongest level in a month. Canada’s loonie was little changed.


The Swiss franc was ground zero to market volatility as many ducked for cover in the Alpine unit to seek refuge from growing fears of a Greek default and the can of worms that could unleash for world markets. A strong franc is considered a bad thing for the export-driven Swiss economy which is already in weak shape. The rise in the franc comes on the eve of a Swiss central bank meeting, suggesting a higher risk that officials could take action and drop its key rates further below zero.


The dollar drifted lower with many expecting the Fed to affirm what’s at least partially baked into the value of the buck: higher interest rates are coming if the economy can stick to an improving path. The dollar would stand to gain if the Fed sounds more hawkish on the outlook and puts more firmly on the table the chance of an imminent rate hike. The dollar could weaken though if the Fed should stress that it would move gradually to boost rates, given the economy’s still delicate shape after contracting in Q1. The Fed will have four more meetings this year after today with the next set for July 28-29.


Sterling soared to one-month highs, basking in a better week for Britain’s economy with inflation back above zero and U.K. wages up. As expected, U.K. central bank minutes were unanimous in voting to keep rates at a record low of 0.50 percent. The minutes put the onus on the inflation outlook as the chief driver of when rates would rise. And the barely above zero rate of inflation reinforced expectations that rates would stay put over the coming quarters. In line with forecasts, British unemployment idled at 5.5 percent in April, a seven-year low. The pound could lose ground as soon as tomorrow if U.K. retail sales should stagnate which is the expectation.


Pre-Fed trade found the euro firmer against the dollar though underlying sentiment remained fragile with Greece reportedly no closer to striking a deal for more money which would be its ticket to remain in the euro zone. Expect the euro to be home to much uncertainty which can subject customer cash flow to sudden, potentially unfavorable, swings. The longer Greece remains a dark cloud over Europe, the less upside the euro should enjoy. Still, if the Fed should disappoint today and come across more dovish than hawkish, the euro would benefit at the dollar’s expense.


Oil strengthened above $60 but that was of little support to the loonie in a generally risk-off market with many opting for safety and shelter in havens like the Swissie. The loonie was also biding its time ahead of today’s afternoon announcement from the central bank south of the border. A Fed message that should play up expectations of higher U.S. interest rates would weigh on the loonie since it’s not a done deal that the next move by Canada would be a rate hike.

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