Currency Market Analysis

Oct 29, 2015 | Currency Market Analysis

Global Themes

The dollar shed some of its Federal Reserve-inspired gains on caution ahead of America’s quarterly economic report card. The dollar soared Wednesday to fresh multimonth peaks after the Fed voiced underlying confidence in the economy and lowered the bar to a rate hike ‘at its next meeting.’ Now that the bar is within reach of a mid-December rate increase, the trick will be keeping it there. The Fed wants to see better data on jobs and inflation before lifting interest rates for the first time in nearly a decade. The ongoing rate debate will be stirred anew today in U.S. data on third quarter growth and weekly jobless claims. Global headwinds and a bigger trade gap likely caused growth to decelerate inside of 2 percent annually after growth nearly 4 percent during the second quarter. Jobless claims are expected to hold in healthy range below 300,000. Data on the U.S. consumer and a Japanese central bank decision loom Friday.


If things stick to the latest scripts laid out by central banks in the U.S. and euro zone, the euro looks set to spend the rest of the year favoring its back foot. The past week has sketched an outlook of lower lending rates in Europe and higher ones in the U.S., opposing policies that have fueled a rise in the dollar and a substantial 4-cent decline in the euro.


Sterling steadied above two-week lows against the dollar with its downside checked by the notion that the sooner the Fed boosts interest rates, perhaps the sooner Britain would. With the Bank of England considered among a minority of central banks contemplating higher interest rate policy to reflect an improving economy, downside for the pound should prove relatively mild.


The kiwi dollar caught a bounce after New Zealand’s central bank held interest rates steady for the first time in four meetings. The RBNZ left its official cash rate unchanged at 2.75 percent, which snapped a streak of three cuts in as many meetings. The RBNZ took some exception with the kiwi’s recent outperformance, a trend that if sustained could hasten another rate cut. The bank’s next and final meeting of the year is on Dec. 10.


The loonie was steady after outperforming its otherwise stronger U.S. counterpart Wednesday in the face of the hawkish Fed. The loonie defied its U.S. peer thanks to a big rally in oil. But keeping Canadian fundamentals on a weak footing, a gauge of Canadian wholesale inflation fell 0.4 percent annually for the second consecutive month.


The dollar’s prospects have brightened so much that slower U.S. growth during the summer quarter won’t deal it a meaningful setback. U.S. growth cooled to a lackluster annual rate of 1.5 percent in the third quarter from Q2’s 3.9 percent pace. The deceleration isn’t expected to last with the job market dispensing an adequate amount of paychecks which should fuel consumer spending, America’s main growth engine, over coming quarters. Jobless claims fared better than expected at 260,000, which helped validate the Fed’s underlying faith in the economy.

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