Currency Market Analysis

Jul 22, 2015 | Currency Market Analysis

Global Themes

The U.S. dollar was mostly on the mend after enduring its biggest spill in a month on Tuesday. The better performing dollar of late hasn’t offered much reason for markets to move away from it. But this week’s light week for the U.S. economy provided an opportunity. Markets also credited the dollar’s decline of about one percent on Tuesday to summer-thinned trading conditions which are notorious for exacerbating volatility. Close to the dollar in popularity is the U.K. pound which gained after area central bank minutes suggested the days of record low lending rates was increasingly numbered. The euro held a penny above three-month lows though its hold on any gain isn’t expected to last given how underlying sentiment remains poor. A near certainty that New Zealand was hours away from cutting interest rates weighed on the kiwi and commodity cousins from Canada and Australia. U.S. housing data is due shortly.


The euro appreciated a penny above three-month lows, gains attributed to profit-taking on the dollar’s advance, and constructive news on the Greek debt crisis. With underlying sentiment negative though the euro remains vulnerable to selling on any rise, suggesting its latest uptick would be short-lived. To gauge how the Greek crisis has impacted the 19-country economy, markets will look to influential business surveys due Friday.


Sterling’s fan base continued to grow after minutes from this month’s Bank of England meeting suggested the days of record low interest rates was on the wane. Central bankers voted unanimously to keep rates at 0.5 percent, though largely because of potential risks to growth from instability in Greece and China. Talk is on the rise both inside and outside of the central bank that area interest rates could rise sooner rather than later, a hawkish outlook that’s pound-positive.


The Aussie dollar remained in striking distance of six-year lows as a smaller than expected rise in local inflation offered ammo for the Reserve Bank to slash rates from 2.0 percent. Headline inflation kept benign, rising 1.5 percent annually in Q2 from 1.3 percent in Q1, which fell short of forecasts of 1.7 percent.


Kiwi dollar volatility was at heightened risk of exploding ahead of an interest rate decision by New Zealand’s Reserve, due today at 5 p.m. U.S. Eastern time. Rates are widely expected to fall from 3.25 percent to help shore up the commodity-battered economy. But given market positioning, and how short positions have become stretched, the kiwi dollar could strengthen if the RBNZ should underwhelm with a smaller cut of less than 50 basis points.


The loonie was back near six-year lows after a pullback in the U.S. dollar on Tuesday helped it form a momentary bottom. Last week’s Canadian rate cut, the second one this year, proved damaging to the loonie and its coming prospects. Next to impact the loonie will be Canadian retail sales Thursday with improvement on the cards.


A takeaway from the dollar’s pullback this week is that it was consistent with a market view that any reincarnated rally may not be one for the record books. Nevertheless, a catalyst loomed for the dollar in a report today on U.S. existing home sales which are forecast to rise for a second month in a row.

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