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Currency Market Analysis

Dec 11, 2018 | Currency Market Analysis

Global Themes

The U.S. dollar was mostly softer after logging its best day of the month when it rallied nearly 1%. Britain’s pound firmed above 20-month lows after enduring a broad shellacking Monday as Brexit uncertainty reached a fever pitch. The euro, yen and commodity currencies also ticked up against the greenback. Signs of a tentative thawing in U.S.-China trade tensions gave players a reason to wade cautiously into riskier waters at the expense of the safer U.S. currency. However, the anything but certain backdrop for Brexit kept investor enthusiasm in check. Markets are taking comfort from an overnight phone call between U.S. and Chinese officials on “the promotion of the next economic and trade consultations.” Better data from Europe helped the euro and sterling recover after declines Monday. Still, heightened Brexit uncertainty should keep European currencies on a fragile footing. A report today is forecast to show slower U.S. inflation at the wholesale level.

CAD

Improved, though still hesitant, market sentiment coupled with higher oil prices supported Canada’s commodity-influenced currency. The loonie Monday had fallen prey to a broad flight to the safer U.S. currency as Brexit pandemonium rattled markets. A more than 1% rally lifted oil prices to the upper $51 area. A lack of major Canadian data after the nation’s blockbuster jobs report last week has largely left the loonie subject to broader market movements. When risk appetite improves and stocks and oil rise, the loonie tends to strengthen.

USD

The dollar pared overnight weakness after warmer than expected inflation data. Core producer prices rose at an annual rate of 2.7% in November, a tick higher than October and two ticks above forecasts of 2.5%. Higher inflation is supportive of the case for the Fed to raise interest rates, a topic the market has viewed with growing skepticism of late which has weighed on the dollar. Dampened expectations for the Fed to raise rates after an expected move next week has limited upside for the buck. Still, intensifying political risk in Britain buoys its safe harbor standing, capping dollar downturns.

EUR

The euro caught a risk-on boost as it recovered from a Monday fall against the greenback. Upside for the euro was considered limited at best given festering political risk in France, the bloc’s No. 2 economy, and caution ahead of the ECB’s final policy decision of the year. The single currency also found some support from data showing a bigger than expected improvement in German investor confidence in December. But the negative print (-17.5) is still consistent with a slower growing economy. Consequently, the euro isn’t likely to gain much traction from the news.

GBP

Sterling stabilized after a sharp, Brexit-induced slide drove it to 20-month lows. The postponement of a crucial vote in the U.K. parliament on the prime minister’s Brexit plan set off an avalanche of uncertainty, rocking the pound. The nonstarter is the insurance policy-like backstop that’s designed to keep an open border between the U.K.’s Northern Ireland and Ireland which belongs to the EU. U.K. lawmakers are against the backstop since it means the EU would continue to call the shots indefinitely. Theresa May is now concession-seeking with her EU counterparts. Any progress on that front would be pound-positive but a lack of a material change would leave pound-negative outcomes on the table. Meanwhile, news of the fastest U.K. wages (3.3%) in a decade in October helped to temper overwhelmingly negative sentiment toward the pound.


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