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Currency Market Analysis

Dec 07, 2018 | Currency Market Analysis

Global Themes

Caution ahead of America’s November jobs report helped the greenback steady after an overnight slide. Major and emerging market currencies were broadly flat ahead of the month’s most anticipated look at the health of the U.S. economy. The dollar lost ground overnight when it dove to late October lows against the yen amid reports that the Federal Reserve may adopt a wait-and-see approach to interest rates next year. Fed optimism in the economy has seemingly cooled on concerns that global weakness could wash up on U.S. shores. Cautious signals from the Fed suggest less upside for U.S. lending rates, a narrative that has taken wind out of the dollar’s sails. Still, persistent worries about trade wars and a moderating world economy continue to underpin safer bets like the greenback. Canada’s dollar pared declines ahead of its monthly jobs report and an expected output decision today from OPEC that could potentially catalyze a significant swing in oil prices. 

GBP

Sterling steadied above 17-month lows as players shifted to the sidelines ahead of America’s monthly jobs report. Is this the calm before a storm next week when the U.K. parliament votes on the prime minister’s Brexit plan? The Dec. 11 vote looms large for the U.K. currency. Passage of the deal, which some consider unlikely, could help to temper political uncertainty and potentially set the stage for a relief rally for the pound. Failure to pass the deal, on the other hand, would tend to heightened U.K. political uncertainty, a scenario that could serve as a green light to dump sterling.

EUR

The euro hovered toward the top of a confined range against the greenback ahead of America’s monthly jobs report. Reports that the Fed may adopt a slower, wait-and-see attitude toward interest rates next year weighed on the dollar to the benefit of rival currencies such as the euro. Still, the euro so far has lacked the momentum to push meaningfully higher amid mounting evidence of a slowing euro zone economy. Data today from Germany showed a surprise contraction in industrial orders in October. The ECB, which holds its final meeting of the year next week (Thu, Dec 13), could set the euro in motion. The bank is expected to announce the end of its QE stimulus at year-end. Any dovish tone that plays up economic headwinds would leave the euro vulnerable.

USD

The dollar slid in knee jerk fashion after U.S. hiring proved less than expected which gave traction to concerns of a moderating economy. America netted 155,000 jobs in November, below forecasts of 200,000. Unemployment and wage growth steadied at 3.7% and 3.1%, respectively. While job growth fell short of forecasts, the gain of more than 150,000 is still consistent with the labor market firing on most cylinders. The dollar looks set for more choppy trade as markets seek answers to whether the U.S. economy is stronger or weaker than it thinks.

CAD

Canada’s dollar soared above 1 ½ year lows after a blockbuster jobs report kept the door ajar for the Bank of Canada to raise borrowing rates. Canada netted a massive 94,100 jobs in November, a robust amount that knocked unemployment two ticks lower to 5.6%, the lowest since 1976. The quality of the report was strong as most of the hiring came from the more meaningful full time jobs. The bullish jobs report bodes better for the BOC to raise borrowing rates during the first quarter of 2019 given its data dependent stance. While stronger, the loonie isn’t out of the woods and could see a meaningful swing if OPEC announces a cut in oil production. A forceful move that shores up sagging oil markets would risk a stronger recovery in the Canadian dollar. 

JPY

The yen steadied after an overnight surge to one than one-month peaks. Sliding U.S. Treasury yields have diminished the dollar’s allure, easing pressure on lower yielding rivals like the yen. The Japanese currency is also benefiting from persistent trade war fears as risk averse shift toward traditional safe harbors. The yen should takes its cues today from Wall Street whose rebound after the U.S. jobs report should limit demand for safer bets. 


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