Currency Market Analysis

Nov 17, 2015 | Currency Market Analysis

Global Themes

Same story, new highs for the U.S. currency. The dollar rolled to seven-month peaks against the euro and a currency basket on the growing belief that interest rates are headed higher in the U.S. and lower in the euro zone. Having the weekend to consider the ramifications of the horrible Paris attacks on markets and global growth has helped contain downside risks. Consequently, market gaze has shifted back to fundamentals which remain skewed in the greenback’s favor against its top peers. U.S. data today, meanwhile, will offer a litmus test of how sturdy American fundamentals are with news on inflation, industrial output and homebuilder optimism. Consumer prices are forecast to rise and if they do it would bolster the case for the Federal Reserve to lift interest rates in the weeks ahead. Sterling enjoyed a modest relief rally on news that core inflation in the U.K. ticked higher. Canada’s dollar steadied.


A rebound for stocks and other risky assets in the wake of the attacks on Paris helped the Aussie dollar to a gain. The Aussie and other high yielders tend to be first in line to underperform when markets turn skittish. The Aussie has found a late year improvement in sentiment in the wake of robust Australian jobs data that depicted a closed door to further RBA rate cuts this year. 


A surprise uptick in core inflation in Britain afforded sterling a modest relief rally. The pound firmed above its lowest level in nearly a week after annual core prices rose 1.1% in October from 1.0% in September. Headline inflation held at -0.1%, holding for a second straight month at the lowest since 1960. The data didn’t alter expectations for the Bank of England to go slow in raising interest rates from record lows of 0.50%.


Canada’s dollar steadied but remained on shaky ground and within reach of 11-year lows. Oil was off to a weak start Tuesday, hovering around ultralow levels beneath $42, keeping a headwind on the commodity-driven Canadian currency.


The dollar shouldn’t stray far from seven-month highs after U.S. inflation improved and kept the Fed on course to lift interest rates as soon as its Dec. 15-16 meeting. The main headline reading rose 0.2% annually in October from zero in September, meeting expectations. Core inflation steadied at 1.9% annually. Overall prices remain tame, however. Fed minutes loom Wednesday at 2 p.m. ET. Should the minutes not match markets’ hawkish aspirations for policy next month, the dollar could lose ground.


The euro fell to seven-month lows on growing conviction that interest rates are soon set to fall in the euro zone. The euro pared declines after German investor confidence brightened for the first time in eight months, rising to 10.4 in November from less than 2 in October. The survey period for the ZEW index was mostly before the terrible attacks Friday on Paris. Going forward, any erosion in sentiment surveys stemming from the Paris attacks would signal greater downside risks for area growth and the euro.

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