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Currency Market Analysis

Sep 25, 2015 | Currency Market Analysis

Global Themes

The dollar merged into the fast lane Friday, notching its strongest in more than a month against a currency basket. The dollar’s acceleration stems from remarks late Thursday from Janet Yellen, the head of America’s central bank, who served notice to markets that U.S. interest rates were on track to increase before year-end. The dollar for weeks has waxed and waned as markets seek clarity on the timing of the Fed’s first rate hike in years. Although Ms. Yellen’s hawkish remarks were a bullish catalyst for the dollar, the ground under it would remain slippery, given the evershifting expectations for U.S. borrowing rates to rise. The broadly weighted dollar index was on pace for a weekly gain of more than 1.5%, its best in two months. Sterling’s more than 3-cent swoon on the week was on track for its worst performance in six months. U.S. data today on growth and the consumer should keep markets volatile.

USD

News that the U.S. economy had eaten a little more spinach last quarter bolstered both the dollar and the case for a 2015 U.S. rate rise. U.S. Q2 growth got upgraded to a 3.9% annual rate compared to forecasts of 3.7%. The data, though a bit stale, implied a fitter economy entering Q3, giving the Fed a green light to lift rates in the not too distant future. 

GBP

Take advantage, GBP buyers: This week has proven the best one in six months for you. Sterling’s more than 3- cent swoon on the week was on track for its worst performance since March. The Fed appears on a smoother path to raise rates this year, while mounting signs of U.K. economic fragility have raised the bar to tighter British policy anytime soon.

EUR

The euro’s Draghi-inspired gains were in shorter supply, eclipsed by hawkish rate hike rhetoric from his U.S. counterpart, Janet Yellen. Speaking after U.S. trading ended Thursday, the Fed chair dropped a stronger signal that its key rate was on track to rise by the bank’s mid-December meeting. EUR/USD remains on uncertain ground over the short run, but its longer run outlook remains bearish with pressure building on the ECB to redouble its efforts to keep its nascent recovery together.

CAD

As good as GBP buyers have it this week, CAD buyers have more reason to smile and take advantage. The loonie bird had its wings clipped as it tanked to new 11-year lows. The still-unsettled outlook for the world economy has weighed on currencies, like the loonie, that take their cues from global growth. Meanwhile, any recovery from recession in Canada appeared slower to take shape in underwhelming news on retail sales earlier this week, weighing on the loonie and keeping the door open to another rate cut north of the border.

JPY

Hawkish Fed chair remarks and bearish Japanese inflation data weighed on the yen, knocking it to two-week lows against the greenback. While odds have brightened in favor of the Fed raising rates before the end of the year, the weakest Japanese inflation in more than two years suggested Tokyo might need to increase stimulus over the same horizon. The 0.1% fall in Japanese inflation in August was the weakest since April 2013.


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