Currency Market Analysis

Oct 23, 2015 | Currency Market Analysis

Global Themes

The developed world doesn’t seem to be ready for a weaker U.S. dollar. That’s been the message this week from central banks in the euro zone and Canada. America’s currency is set for a solid weekly gain after the European Central Bank hinted strongly at possibly boosting stimulus before the end of the year. What was particularly damaging to the euro, which hit two-month lows against the dollar Friday, was that the ECB placed its entire arsenal of easy money policies on the table, indicating it would go to any length to boost growth and inflation, and put a lid on the euro. The ECB noted how the euro has risen markedly in recently months, an upturn that’s kept inflation in a danger zone near zero. The dollar’s upturn could incentivize the Federal Reserve to dial back on rate hike expectations, tighter policy that would risk a further acceleration in the U.S. unit. The Fed next meets on Oct. 27-28.


Slower Canadian inflation should cement a winning week for the U.S. dollar against its northern counterpart. Consumer inflation slowed more than expected to 1% in September from 1.3% in August, a tame level that augurs low interest rates for longer. The loonie fell towards Thursday’s Oct. 5 low against the dollar.


Central banks seem to abhor strong currencies which have proven bad for growth and inflation. That was the underlying message this week from the ECB and Bank of Canada whose growth downgrade toppled the loonie from multimonth peaks. Any cautious tone from the Fed next week aimed at dampening rate hike expectations would leave the dollar at risk of surrendering some of this week’s broad gains.


Sterling steadied against the dollar, underpinned by its burst of strength against the ECB-beset euro. Sterling’s massive gain of nearly 2% against the euro Thursday marked its best single day performance since January 2009. The pound was on track for a mild weekly decline against the greenback with some staking defensive positions ahead of Tuesday growth data that’s forecast to show slower expansion of 0.6% in Q3 from 0.7% in Q2.


The euro awoke with a severe ECB-induced hangover and at its weakest level in two months against the dollar. The euro’s sharp 2% slide came at the hands of the ECB who on Thursday signaled in no uncertain terms that lower rate policies could be on the way as soon as bankers next meeting in early December. The ECB side of the coin for the euro augurs meaningful weakness, something considered constructive for area growth and inflation. However, the Fed and its fuzzy outlook for interest rates could help slow the euro’s descent. The Fed isn’t expected to hike rates next week but it if stops short of green lighting an imminent rate increase it would undercut strength in the dollar. 


While the ECB mulls easier policies, China on Friday cut lending rates for the sixth time in less than a year, lowering its base rate by a quarter-point to 4.35%. The move came days after China reported better than expected Q3 growth of 6.9%. China’s growth-positive action, and expectations for the ECB to soon follow suit, has been a boon for riskier assets like stocks and higher yielding currencies like the Aussie, kiwi and Canadian dollars, units that take significant cues from global risk sentiment. 

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