Global Themes

The U.S. dollar kept on the defensive, held hostage to political risk in Washington. U.S. lawmakers have until just after midnight ET to agree on a spending bill or risk shutting down the federal government. The mostly weaker U.S. currency was down a quarter percent against the euro and nearly twice that against the Japanese yen. The buck was little changed against counterparts from Britain and Canada. The high-stakes political drama in Washington catches the greenback at a particularly vulnerable time. The dollar has continued to bleed value this year as growth overseas picks up and reduces pressure on other central banks to maintain accommodative policies that had weighed on rival currencies like the euro, yen and Canadian dollar. The buck was poised for its fifth fall in as many weeks. A preliminary gauge of U.S. consumer sentiment comes out today and could reflect unease in the nation’s capital. 

EUR

The euro stuck close to three-year peaks Friday which had it on pace for its fifth win in as many weeks against the greenback. The euro bent but didn’t break this week despite attempts by ECB officials to check its economy-squeezing rise. The stronger euro, which appreciated by a whopping 14% in 2017, the most since 2003, puts a headwind on exports and already low inflation. The ECB will be the main event for the euro next week when President Mario Draghi and company render their first decision of the year on Jan. 25. While no changes are expected, the euro and major currencies could still swing unpredictably on the words and tone of officials’ statement.

GBP

Sterling steadied near mid-2016 highs and was little swayed by disappointing news on U.K. consumers. Retail sales sank 1.5% in December which offered evidence of high inflation squeezing consumers. The pound instead has capitalized on the greenback’s weakness. The pound has also found support from hopes for a Brexit deal that doesn’t come at a high price for the U.K. economy. Looming next week: U.K. numbers on unemployment Wednesday and fourth quarter growth Friday.

JPY

A growing risk of an imminent U.S. government shutdown buoyed haven currencies like the yen which climbed to four-month highs against the greenback. The yen has been flying higher on its own merit on the nascent notion that Japan may not lag as far behind the Fed in normalizing policy than previously thought. The Bank of Japan issues a policy decision Tuesday. While no changes to its below zero interest rate is expected anytime soon, officials could drop yen-impacting hints on the path for policy.

USD

Confidence continued to cool on the U.S. currency as Capitol Hill moved to the brink of shutting down the federal government. The House agreed to a spending bill Thursday, but it remained uncertain whether the Senate would pass a deal. A government shutdown as soon as Saturday could spark an avalanche of dollar-selling as it would spell heightened uncertainty for markets and consumer and business sentiment that could impact the wider U.S. economy. Averting a government shutdown, on the other hand, may ease pressure on the dollar but not reverse its broader downtrend.

CAD

Weaker oil markets grounded the commodity-driven Canadian dollar. The price of oil was down nearly a percent, below $64. The loonie endured a volatile week after the Bank of Canada raised interest rates for the third time since mid-2017 but acknowledged concerns about the fate of Nafta. The coming week will be critical for the C$ as Nafta negotiations resume in Montreal, and Canada releases central bank-impacting surveys on retail sales Thursday and consumer inflation Friday.

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