Currency Market Analysis

Jul 16, 2019 | Currency Market Analysis

Global Themes

Currency markets brace for China GDP

Markets will be focused on Chinese gross domestic product data due to be released at 10am this morning, where analysts expect second-quarter growth to have slowed to 6.2% from a year earlier - the weakest annual pace since early 1992.

A disappointing number would add to worries about slowing global growth and reinforce the case for more stimulus by Chinese authorities as a damaging trade war with the United States rages on.

Alongside GDP, China will also publish activity data for June including retail sales, industrial production and urban investment, which could give more clues on whether earlier support measures are starting to kick in, or if more policy easing is needed.

US equities power to all-time high

Despite an imminent rate cut in the US due to concerns about the economy, US equities rose to all-time highs on Friday as investors ended a record-setting week on a high note.

The Dow Jones Industrial Average rose by 0.9%, to 27,332. The S&P 500 gained 0.5% to end the day at 3,013, posting its first close above 3,000. The Nasdaq Composite advanced 0.6% to 8,244.

Global stock markets posted solid gains last week following testimony from the US Federal Reserve that confirmed a rate cut was coming next month. The Dow closed above 27,000 for the first time on Thursday and Friday’s gain brought its increase on the week to 1.5%.

Stronger inflation data fails to support US dollar

The US dollar fell for a third consecutive day on Friday as stronger-than-expected U.S. inflation data failed to shake convictions that the Federal Reserve will start cutting interest rates in the coming weeks. Against a basket of other currencies, the dollar fell 0.1% to 96.94 and posted its biggest weekly drop in three weeks.

The core U.S. consumer price index, excluding food and energy, rose 0.3% in June, the largest increase since January 2018, data on Thursday showed. The reading pushed U.S. Treasury yields higher, but money markets still indicated one rate cut at the end of July and a cumulative 64 basis points in cuts by the end of 2019.

The dollar’s weakness revived carry trades, where hedge funds borrow in low-yielding currencies such as the Swiss franc and the euro to purchase higher-yielding ones such as the Australian or New Zealand dollars. Both currencies have strengthened significantly against the dollar in the past week, with the AUD now trading above 70 US cents and the NZD trading above 67 US cents.

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