Global Themes

The U.S. dollar enjoyed a broad safe-haven boost Wednesday as a key barometer of currency markets in recent days, Wall Street, pointed to a negative open when trading gets underway. The dollar firmed against the euro, sterling and Canadian dollar but lost ground to the yen, another popular refuge when market confidence deteriorates. The sharp slide in global stocks showed signs of abating yesterday after the Dow rallied more than 500 points. Still, underlying market sentiment remains decidedly cautious as players adjust and reposition for a backdrop of rising inflation and less stimulus from central banks whose low-rate policies have been a boon for stocks. Trading could be choppy in the day ahead with a host of Fed officials due to give public remarks. Sterling and the Canadian dollar were camped near multiweek lows ahead of a Bank of England decision Thursday and Canada’s jobs report Friday.


The euro surrendered some strength as risk-averse players favored the safer greenback, the world’s most liquid currency. Downside for the euro has proven relatively mild, thanks in part to reports that Germany appears on the cusp of finally forming a coalition government after months of uncertainty since an inconclusive election in September. Market volatility has interrupted the euro’s upturn which could resume when global markets regain their composure and focus pivots back to brightening fundamentals in Europe. 


The U.K. pound favored two-week lows on the eve of a policy decision by the Bank of England. The BOE will provide a slew of signals as tomorrow marks “Super Thursday,” when the central bank issues a rate decision, the minutes of the meeting, and a quarterly report on the outlook for inflation and growth. Sterling has struggled this week after disappointing data on the economy-driving services sector underwhelmed and suggested growth slowed to begin the year. What the BOE’s tone suggests about chances of an interest rate hike from 0.5% as soon as the second quarter will be critical for the pound.


The dollar index notched two-week peaks as risk-averse players sought safety with U.S. stock futures flashing red. The dollar’s gains were mostly muted with political risk simmering ahead of Washington’s deadline Thursday to reach a deal to fund the government or risk a second shutdown in as many months. The dollar has fared better in recent days, but the jury remains is out on whether last week’s inflationary wage data altered its otherwise dim disposition. With inflation in focus, the dollar could have a heightened sensitivity to U.S. consumer prices data on Feb. 14.


The yen was broadly in vogue as risk aversion reigned with U.S. stock futures flashing red. The yen tends to shine when market turmoil flares and investors ditch risk for safety. Japan’s stable banking sector and current account surplus lends the yen its safety status. Still, elevated U.S. Treasury yields near four-year highs limited support to the yen and put a tentative floor under the dollar.


Canada’s dollar softened in step with lower oil markets and the firmer greenback. Canada’s currency hit four-week lows this week amid a broad flight to safety in the U.S. currency as global stocks, led by losses on Wall Street, sold off. Canada’s jobs report Friday should offer the next meaningful steer for USDCAD. Forecasts call for slower job growth and unemployment to inch above four-decade lows. Canada’s job market has been on a tear, so if the jobs report should surprise to the upside it would bode bearishly for USDCAD as it would keep the door open to a Bank of Canada rate hike from 1.25% by the middle of the year.

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