Global Themes

The U.S. dollar staked out higher ground as it chugged to fresh 2018 peaks. The euro took a politically-induced plunge to five-month lows. Sterling hovered near lows for the year while the Canadian dollar steadied after a recent slide. The buck’s vital signs remained on the robust side with Treasury yields maintaining multiyear highs, burnishing its appeal, and positive news this week of solid U.S. consumer spending, the main engine of American growth, for a second straight month. A dubious spotlight is shining on Italy today with the nation still in the throes of forming a coalition government following March elections. And making matters worse, reports surfaced that the anti-establishment parties in Italy may consider debt relief to the tune of around €250 billion. The background of a messy political, fiscal and economic situation in a Top 3 euro zone country served as a green light to push the euro lower.

EUR

The euro sank to mid-December lows as the market found another reason to reduce ties to the single currency. While area growth has moderated, Italy represents a growing concern for the bloc. Italy is still in the process of forming a coalition government out of anti-establishment parties: The 5-Star Movement and the far-right League. Meanwhile, reports surfaced today that the parties in coalition talks may seek massive debt forgiveness of around €250 billion. The news served as a stark reminder of the fragile fiscal and economic shape of a Top 3 nation in the 19-country euro zone.

GBP

Sterling hovered near December lows against the greenback after U.K. jobs data this week suggested the Bank of England was in no rush to boost borrowing rates from 0.5%. Unemployment held at multidecade lows and wages rose. Yet the sub-3% increase in wages was on the tame side, stopping short of an inflationary reading needed to justify the case for a U.K. rate hike.

JPY

The yen enjoyed a counterintuitive boost as it appreciated a bit despite news of Japan’s first economic contraction in years during the first quarter. The world’s No. 3 economy fell by 0.6% last quarter, more than forecast. The data also came with downward revisions to fourth quarter growth. The data set the stage for Japan’s economy to grow at a slower pace this year, a scenario that suggests the Bank of Japan may pursue low interest rates for longer. Global stock market weakness allowed the yen to garner a haven bid.

CAD

A steadier Canadian dollar kept toward the weaker end of its range against the dollar. Lower oil prices below $71 could limit leeway for the Canadian currency to climb above its lowest level in nearly a week. NAFTA issues remain front and center for the loonie ahead of a Thursday deadline to reach a deal. Inflation and retail sales for north of the border loom on Friday, numbers with the potential to make or break the case for a Bank of Canada rate hike from 1.25% on May 30. Futures pricing suggest a more than 50% chance of the BOC leaving rates unchanged this month.

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