Currency Market Analysis

Jun 24, 2015 | Currency Market Analysis

Global Themes

The U.S. dollar remained in positive territory for the week but surrendered some of its big gain from the day before. The broadly weighted U.S. dollar index soared more than 1 percent on Tuesday for its best day in nearly a month. The U.S. economy’s solid showing so far this week, along with hawkish comments from a Federal Reserve official, served to strengthen the case for the central bank to boost interest rates at least once over the balance of the year. Market confidence waned on Wednesday which weighed in riskier assets like stocks and higher-yielding currencies, benefiting safer, lower-yielding ones like the euro. No sign of a finalized deal yet to dole out more money to cash-strapped Greece pressured markets. The Greek situation remains fluid which should keep currencies on a volatile footing. Adding to markets’ cautious tone today, Germany’s Ifo survey of corporate optimism dimmed for a second straight month, falling to a four-month low of 107.4 in June. Sterling firmed as did the Canadian dollar which benefited from oil’s move back above $60. The final estimate of U.S. first quarter growth is expected to show a shallower contraction of 0.2 percent.


America’s smaller first quarter contraction was largely met with a yawn by markets, old news with the end of the current quarter in sight. Still, the upgrade spoke better about the economy’s underlying health which is supportive of the case for the Fed to boost interest rates. U.S. growth contracted 0.2 percent last quarter, a fraction of the previous reading of -0.7 percent. U.S. yields have generally been on the upswing in the wake of news this week of the fastest existing and new home sales in years. Dollar sentiment also brightened in remarks from Fed Gov. Jerome Powell who acknowledged this week that he was in the two rate hikes by year-end camp. Once Greece fades to the background the dollar could make a fresh run higher, providing U.S. data fuel the rate debate and the Fed seems more likely to lift lending rates sooner rather than later.


The loonie eked out a gain thanks to a rebound in oil to above $60. Canada’s unit remained in negative territory on the week, however, with the big dollar to the south buoyed by growing expectations for U.S. interest rates to rise this year.


The euro got ‘carried’ above two-week lows as markets grew nervous over prospects of Greece clinching an imminent deal for more rescue cash. Greece’s creditors reportedly shot down Athens’ latest proposal to win more rescue money, dealing a setback to negotiations. The European Central Bank's (ECB’s) rock bottom interest rates leave the euro vulnerable to being used as a funding currency for bets on higher-yielding currencies like the dollar, so-called ‘carry trades.’ When a Greek deal appears in reach, markets tend to party and rush into higher-yielding plays. When confidence in a Greek deal wanes, party goers are often forced to buy back the euro as they unwind carry trades. Upside for the euro looks limited after Germany’s Ifo survey of business confidence weakened more than expected, hitting four-month lows, which offered evidence of Greek uncertainty increasing a headwind on the bloc’s biggest economy.


Sterling was on a mixed footing, still in the red for the week against the dollar, but holding near multiyear peaks overall. Rising wages in Britain have some starting to pencil in the possibility of a 2015 rate hike by the Bank of England, supporting the pound.

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