Global Themes

A nascent turn in the U.S. dollar moved it further above recent multimonth lows. The greenback was mixed but mostly stronger Tuesday, extending a rebound against the euro and others. The yen was the best performing major currency after a modest move by the Bank of Japan was consistent with the central bank tapering stimulus later this year. A setback in euro zone inflation last week helped to catalyze a downward correction in the high-flying euro which enjoyed its best year in 14 against the greenback in 2017. Meanwhile, the ECB meets in a few weeks and is likely to be none too pleased with the stronger euro and lower inflation which put dual headwinds on the bloc’s economy. The U.K. and Swiss currencies also declined against the dollar. Canada’s dollar opened flat but could soon attract buying with oil above $62, a new 2 ½ year high.


Canada’s dollar was little changed as it consolidated a rally to three-month highs following last week’s blockbuster jobs report. At 5.7%, Canada is sporting the lowest jobless rate in four decades. The strengthening labor market points to an elevated risk of the Bank of Canada raising interest rates next week. Still, a quarter percentage point rate hike to 1.25% may not be a done deal on Jan. 17, with underlying inflation at 1.3%, below the 2% level that the BOC’s deems consistent with a healthy economy.


It’s taken a while but encouraging news on the U.S. economy has started to buoy the dollar and allow it to correct after sinking to 3 ½ month lows versus a trade-weighted basket of currencies. Numbers last week showed the strongest manufacturing in 3 months and the lowest unemployment in 17 years. Sturdy fundamentals keep the Fed on track to raise rates several times this year, higher rate policy consistent with a better performing greenback. The dollar’s nascent turn could use reinforcing from good news on the U.S. economy, with attention squarely focused on Friday’s retail sales and consumer prices.


The yen proved impervious to the stronger dollar thanks to a modest tweak in Japanese central bank policy. The Bank of Japan announced a move to reduce its holding of long-dated government bonds. While not a major move, the decision elicited a bounce in the yen as it was consistent with policymakers tapering stimulus as soon as later this year. Upside for the yen was capped by rising U.S. Treasury yields, with the 10-year near 2.50%. Yield differentials in the U.S.’s favor is a boon for USDJPY.


Sterling moderated from recent peaks against the U.S. dollar, with its next move likely to hinge on the strength of U.K. data Wednesday on factory growth and trade. The numbers will offer clues on how the British economy fared over the final quarter of 2017. GBPUSD also softened in sympathy with EURUSD whose breakneck rally has left it vulnerable to a correction, particularly ahead of the ECB in a few weeks.


The euro declined to late December lows as caution caught up with the high-flying currency. The euro’s inability to match last year’s high, coupled with inflation moving further away from the ECB’s near 2% goal, helped to catalyze the correction. That’s why the euro is down today despite bullish news on euro zone unemployment which ticked down to 8.7% in November, the lowest in nearly 9 years. The ECB issues its first policy decision of the year on Jan. 25. Euro bulls could be satiated for now given the risk that the ECB may use its coming meeting to jawbone its currency lower. 

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