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Currency Market Analysis

Jan 10, 2019 | Currency Market Analysis

Global Themes

The U.S. dollar steadied after descending to October lows versus the euro and a basket of currencies. The buck stabilized against the euro, sterling and Canadian dollar but slipped against the yen. Appetite for safety increased on reports that the latest round of U.S.-China trade talks failed to produce a major breakthrough. Dollar sentiment dimmed markedly after a chorus of Fed officials have emphasized caution with respect to future rate increases. The market remains skeptical in the Fed’s forecast to two rate hikes this year given economic clouds on the horizon in the form of volatile stocks, trade uncertainty and a slowing global economy. Compounding the dollar’s descent has been overcrowded positioning that’s encouraged some bulls to head for the exits. While the buck’s outlook has darkened on the perception of a sidelined Fed, it still retains its safe harbor standing that should buoy it during periods of global uncertainty. The Fed chair speaks today at lunchtime, remarks that could impact the dollar.


Sterling kept to the top of its range against the dollar but it’s lacked the buoyancy that the euro has enjoyed, a sign of the messy political situation in Britain over Brexit. Little, if anything, has changed to bolster the prime minister’s chances of parliament next week approving her Brexit plan. Failure to pass Theresa May’s EU-endorsed Brexit deal could hasten early elections in Britain and heightened already elevated political risk associated with sterling. In short, the pound could be subject to surprise volatility over the coming days and weeks.


The euro steadied after its best performance in months Wednesday propelled it to mid-October peaks. The fact that the euro topped its 100-day moving average was a bullish sign that suggests more upside potential over the short run. Still, the euro’s outperformance largely stems from the sputtering dollar. To be sure, the latest data from Europe have disappointed, dampening chances of an ECB interest rate hike later this year. 


Canada’s dollar pared part of a rally that lifted it to five-week peaks against the greenback. The loonie has been a primary beneficiary of oil’s 15% rally to above $50 to begin the year, a boon for the Canadian unit given how the nation is an influential commodity player. And while the Bank of Canada left interest rates steady this week at 1.75%, the central bank said that it still intends to raise rates toward a neutral level ‘over time,’ a more hawkish view than the market has appreciated, one that opened the door wider to a loonie-positive rate hike by year-end.

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