Currency Market Analysis

Sep 11, 2015 | Currency Market Analysis

Global Themes

The U.S. dollar steadied but was on track for a week of general underperformance stemming from uncertainty about when the Federal Reserve would boost interest rates. Against the yen, however, the dollar was headed for a weekly gain, with the Japanese unit coming under friendly fire. Reports this week indicated a Japanese lawmaker saw a case for the nation’s central bank to step up economy-strengthening stimulus around its late October meeting, weighing on the yen. The Fed has a tough task next week in deciding whether to raise rates for the first time in nearly a decade or wait another month or three to ride out the latest market upheaval. The U.S. economy, meanwhile, continues to make an uneven case for a rate hike, with the job market showing steady improvement, though inflation continues to lag and remains low. The rate debate will be stirred in U.S. data today on inflation and the consumer.


The Aussie dollar’s nearly 2 percent gain this week had it on track to log its best week in a year and a half. Helping awake a few Aussie bears out of hibernation was reduced risk aversion in markets that helped whet some appetite for higher yielding currencies, and Australia’s job market which showed surprise strength in August, suggesting a lower risk of another rate cut in the near future. Gains for the Aussie could prove the unsustainable variety with uncertainty abound over China, Australia’s chief trade partner.


Sentiment brightened for the U.K. pound this week after the nation’s central bank played down risks to growth from China-led global weakness. That allowed sterling to halt a 9-day skid that had dropped it to its weakest in four months against the dollar. The turnaround, though tentative in the wake of a subpar stretch of U.K. data, had the pound headed for its first winning week in three.


The euro steadied around one-week highs against the dollar and was on track for a weekly advance, buoyed by dollar-restraining uncertainty over U.S. interest rates, and constructive news from the bloc that showed upgraded growth during the second quarter. The euro has now erased its ECB-inspired losses of last week, though a daunting week ahead looms when the spotlight will shine on the rate hike leaning Fed.


The loonie was pinned near decade-plus lows as oil took a 2 percent spill to $44. The Bank of Canada’s steady hand this week on rates helped to momentarily tap the brake on the loonie’s 14 percent swoon this year. At best, though, borrowing rates appear tentatively on hold north of the border while to the south are poised to rise sooner or later, a view that adds context to expectations for USD/CAD to continue to grind higher.


The dollar was little scathed following another tame print of U.S. inflation. Less volatile core producer prices rose 0.9 percent in July, above forecasts of 0.7 percent and the 0.6 percent increase in June. Though better than expected, the overall low level of inflation gives the Fed cover to hold fire on a rate hike next week which should keep dollar bulls in a timeout and huddled along the sideline. Uncertainty and volatility should be the name of the game through next week and likely beyond as markets react to the Fed’s decision, due Sept. 17 at 2 p.m. ET. Watch those fresh forecasts from the Fed on growth, inflation and unemployment, and chair Janet Yellen’s press conference which should also rouse currency volatility.

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