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Currency Market Analysis

Aug 10, 2018 | Currency Market Analysis

Global Themes

Trouble in Turkey spurred a stampede into the U.S. currency which powered to fresh highs. The dollar broke through key levels and surged to mid-2017 highs against the euro and sterling. The greenback also rallied against the Canadian and Australian dollars and posted its biggest gains against emerging markets. Turmoil intensified in Turkey Friday, sending the nation’s currency down more than 10% to fresh record lows. The market has increasingly soured on Turkey as it loses confidence in the president’s economic policies. Turkey’s troubles have been exacerbated by its nosediving currency, the lira, whose precipitous fall of more than 60% this year has made it harder for the government to repay its stockpile of dollar-denominated debt. Turkey’s crisis gathered steam Friday on reports the ECB was studying how exposed euro zone bank are to Turkish assets. Already on the move, currencies could see further volatility once reports today on U.S. inflation and Canadian employment are released at 8:30 a.m. ET.


Firing on all cylinders, the dollar index soared to more than one-year highs, boosted by America’s outperforming economy and haven demand from economic and political uncertainties in Turkey and Britain, respectively. The Fed seems on track for another couple rate hikes by year-end after U.S. core inflation surprised to the topside, rising at an annual rate of 2.4% in July. The dollar’s short run prospects brightened anew after it finally cracked through key psychological levels. Attention next week will be on U.S. retail sales, due Wednesday. 


The Mexican peso slid more than 1%, falling in sympathy with other emerging markets that were upended by the rout in the Turkish lira. Markets are shunning a wide range of risky assets like stocks and higher yielding currencies, a backdrop that is often negative for the peso. 


The euro tumbled through a key floor, hitting its lowest since July 2017. The market is entertaining the notion that economic trouble in Turkey might potentially spread to banks in Europe with exposure to Turkish assets. Reports indicated that the ECB was looking into how exposed banks in France, Italy and Spain are to Turkey. Italian finances are also in focus with markets worried that the nation’s coalition government could soon embark on a debt-fueled spending spree.


Sterling fell into a deeper hole Friday, its biggest since June 2017, as in line with forecast U.K. data failed to arrest its Brexit-induced slide. Britain’s economy grew 0.4% during the second quarter which marked an acceleration from the lackluster rate of 0.2% in the first quarter. Industrial output also it the bullseye, up 0.4% in June. The data failed to buoy the pound as concerns over the road to Brexit continued to overshadow, while it also didn’t help that turmoil in Turkey sparked a fresh wave of dollar buying as a safe harbor. GBPUSD has shed about 2% this week which is on track for its worst since February.


Canada’s dollar seesawed as strong domestic job growth competed with a fresh leg higher in the greenback. Canada’s addition of more than 50,000 jobs in July proved much stronger than forecasts of a gain of 17,000. Robust hiring knocked unemployment down two ticks to 5.8%, a multidecade low. The quality of the report was mixed, however, as all of the hiring came from less desirable part time positions. Still, coming on the heels of strong data on growth, inflation and retail spending, today’s numbers should help to open the door wider to a loonie-positive Bank of Canada rate hike by the end of the year.

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