Currency Market Analysis

Jan 06, 2016 | Currency Market Analysis

Global Themes

Market nerves remained frayed early in the new year, translating into growing support for safe havens like the U.S. and Japanese currencies. The dollar steadied around one-month highs against the euro while it notched April peaks against sterling, and soared to 12-year top against Canada’s loonie. The yen fared even better, leapfrogging the dollar, and rising to multimonth highs and euro. Market sentiment is off to a decidedly sour start to the year with China at the heart of the tumult. Overnight data showed China’s services sector grew at the slowest rate in 1 ½ years which followed downbeat news Monday on manufacturing. Market confidence has also taken hits from tensions in the Middle East and reports of a nuke test overnight in North Korea. A slew of U.S. data today along with the minutes to the Fed’s December meeting could stoke further volatility. 


Faster euro zone services growth last month helped the euro steady above one-month lows. But the euro remained on a weak footing after area inflation figures this week disappointed. The inability of inflation to improve from 0.2 percent opened the door wider to the prospect of stronger stimulus this year from the European Central Bank. Area unemployment, due Thursday, is expected to hold at a high 10.7 percent. 


Signs of slowing growth at home and abroad, and doubts about Britain’s membership in the EU continued to take a toll on sterling sentiment, driving it to fresh April lows. On the heels of weaker U.K. manufacturing growth this week, a report today showed a similar slowdown in services growth, subdued readings that keep a U.K. rate hike out of view and a burdensome weight on the pound.


China worries and falling commodities dragged the Aussie and kiwi dollars to November and December lows, respectively. China remains a growing concern after its stock market debut the year with a massive 7 percent plunge with reports showed anemic manufacturing and services activity with the latter overnight hitting a 17-month low. 


Global jitters and another big drop in oil sent the loonie spiraling to new 12-year lows. Oil sank 3 percent early Wednesday, falling below $35. Better economic news from Canada could help slow the loonie’s descent as the nation logged a smaller trade gap of C$2 billion in November, down from a C$2.5 billion deficit in October. Are we C$1.50 bound this year? Keep close tabs on oil and its impact on Canada’s economy, and the Fed and how frequently it moves to lift interest rates. 


The dollar’s quick start to the year received some fundamental backing as payrolls giant ADP reported private employment growth of 257,000 in December, the most in a year. The data suggests a solid start to the year for the job market, keeping the Fed on track to raise interest rates this year. America’s trade deficit narrowed more than expected to $42.4 billion in November, suggesting fourth quarter growth hovered around 2.0 percent. Minutes from the meeting at which the Fed raised rates for the first time since 2006 loom at 2 p.m. ET. A hawkish tone would be supportive of both the dollar and expectations of higher U.S. rates in the months ahead. 

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