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Currency Market Analysis

Dec 06, 2019 | Currency Market Analysis

Global Themes

USD

The dollar finishes the first week of the holiday season at a 1 month low thanks to a multitude of weak data. The DXY, which measures the US dollar against a basket of six currencies, is trading down close to 1% since the beginning of the week at around 97.355. US payroll proved a surprise to the upside which could provide a short-term boost to the greenback ahead of the weekend.

At its last monetary policy meeting, the US Federal Reserve (Fed) stated interest rates would remain unchanged while policymakers assess and scrutinise economic data. The recent run of lacklustre data increases the risk of a dovish tilt by the Fed this when policymakers meet next Tues/Wed. The jobs market is a key indication of the health of an economy; None farm payrolls increase by 266k in November and more importantly, unemployment fell to a new low of 3.5% which could be very important ahead of the meet.

We will have to see how this surprise data effect the dollar throughout today, the odds of a US rate cut are now extremely unlikely. The immediate impact was seen mostly against the Canadian dollar with the greenback up 0.5% soon after the release. GBP held steady following its strongest run in a long time.

CAD

The Organisation of the Petroleum Exporting Countries (OPEC) and non-OPEC producers led by Russia agreed to cut output by an extra 500,000 barrels a day in the first quarter of next year. This was expected and the price of oil steadied near 2-month highs. Currencies with positive correlations to commodity prices include the NOK, CAD, AUD and NZD, have strengthened albeit modestly.

Oil prices have rebounded over the past week or so on hopes of a US-China trade deal breakthrough. The ongoing trade spat has weakened global demand and therefore production, which has weighed on oil demand and thus dragged prices lower. Earlier this week, the black gold soared over 4% on anticipation of further production cuts but also data revealed falling US crude stockpiles. The confirmation of supply cuts has kept oil prices elevated and commodity sensitive currencies, particularly the CAD and NOK, have appreciated against the US Dollar.

However, the pound remains this week’s winner and GBP/CAD has recorded five consecutive daily gains while GBP/NOK notched new post-referendum highs yesterday.

GDP

Sterling’s incredible over the last few weeks shows just how influential political headlines are for the UK currency at the moment. Even after a small pullback this morning (near term profit taking is probable), GBP remains one of the best performing currencies of the week. Much of the rally owes itself to the increasing odds of a majority for the conservative party led by Boris Johnson.

As markets continue to price in a Tory victory, GBP/USD has raced to new 7-month highs and GBP/EUR a fresh 2-½ year high. The risk reward may now favour sterling downside from here as traders betting on sterling depreciating have likely closed their positions. Investors may now be reluctant to re-enter the market with aggressive bids and instead opt to hold fire as we head into the general election on the 12th of December.


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