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Currency Market Analysis

Dec 04, 2018 | Currency Market Analysis

Global Themes

No sign of a bottom yet for the weaker U.S. dollar which slid Tuesday to new multiweek lows. The greenback posted a range of losses against its major peers and kept on its back foot against most emerging markets. Higher oil above $53 buoyed Canada’s dollar. The dollar’s leg lower traces back to last week when cautious remarks from the Fed chairman dampened expectations for U.S. interest rate hikes next year. The Fed’s series of rate hikes since late 2015 have been one of the driving forces behind the dollar’s run. Meanwhile, some dollar bulls have fallen off the bandwagon in the wake of the U.S. and China reaching a temporary trade truce, while lower Treasury yields, with the 10-year below 3%, also gnawing at sentiment. While weaker, downside for the dollar could prove limited thanks to global uncertainties and expectations of another solid U.S. jobs report Friday. 


Sterling jumped above five-week lows after a top European court issued a preliminary verdict indicating that the U.K. could decide unilaterally to back out of Brexit. The market is merely toying with the idea of Britain potentially voting to remain in the EU bloc. The court’s decision is only an opinion and is subject to a final ruling. Still, it came at a time of dollar weakness which helped the pound gain added traction against its softer U.S. counterpart. Britain’s parliament on Dec. 11 will decide whether Mrs. May’s Brexit plan succeeds. Failure to pass the deal could tip over a messy can of worms for FX markets.


The Aussie dollar held firm despite a decision by the Reserve Bank of Australia to leave borrowing rates unchanged at a record low of 1.50%. The bank sounded generally pleased with the economy, though data this week are forecast to show some moderation. Data Wednesday is forecast to show Australia’s economy grew at a slower pace, with an increase of 0.6% during the third quarter after expanding by 0.9% during the second quarter. 


The euro rallied on the back of its weaker U.S. rival. The dollar’s dip helped the euro sweep to the side key weights such as mounting signs of a weakening euro zone economy. The single currency also benefited from lower U.S. Treasury yields which dulled the dollar’s appeal. Germany issues key gauges of factory growth on Thursday and Friday. Outcomes consistent with a moderating German economy would risk inviting renewed euro selling.


Rebounding oil markets ahead of an OPEC meeting Thursday to decide on output policy buoyed Canada’s dollar which hovered at multiweek peaks. The loonie also capitalized on greenback weakness following the G20 meeting. USDCAD weakness has also been compounded by the perception of a dovish turn for the Federal Reserve, a view that’s helping to limit policy divergence between the North American central banks. Come Wednesday, the Bank of Canada is expected to leave borrowing rates unchanged at 1.75% after nearly a half dozen increases since mid-2017. Any expression of caution from the BOC in the wake of the oil market collapse would tend to limit gains for the loonie.

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