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Currency Market Analysis

Feb 05, 2019 | Currency Market Analysis

Global Themes

America’s dollar fared mixed but mostly firmer, boosted by the U.S. economy’s solid start to the year. The dollar added to recent gains against Europe, hitting its strongest in two and 10 weeks versus rivals from Britain and Switzerland, respectively. Commodity currencies and emerging markets also outperformed on hopes that the U.S. and China were moving toward a compromise trade deal. More than a month into the year, the world’s biggest economy appears to be doing fine. January job growth proved the strongest in nearly a year, boding better for consumer spending and the wider economy. Meanwhile, the picture overseas continues to dim in data showing European economies barely grew last month. Despite America’s economic resilient, the outlook remains cloudy with U.S. growth at risk of succumbing to the global slowdown. Attention today will be on U.S. services growth and the president’s primetime State of the Union address.


Britain’s all-important services sector logged the weakest growth in 2 ½ years to begin the year, demonstrating how Brexit uncertainty has weighed on business optimism. Moreover, the print of 50.1 was consistent with growth at a standstill. The downbeat data cemented expectations for the Bank of England to leave interest rates at 0.75% on Thursday. Sterling sank through key support, its 200-day moving average, a sign that more losses could be on the way.


The euro flirted with one-week lows amid mounting evidence of a slowing European economy. A broad business survey only fell by a tick to 51.0 in January from 51.1 in December, but that marked the lowest level in 5 ½ years. Mounting signs of a moderating European economy suggest the bloc’s central bank would err on the side of maintaining stimulus for longer, pushing back expectations for borrowing rates to rise from crisis lows. The perception of low rates for longer makes the euro less attractive to those seeking yield. 


The solid shape of the U.S. economy has given investors renewed reason to wade back into dollar-based assets. The dollar owes its rebound to last week’s bullish jobs report that reduced already low odds of a potential interest rate cut from 2.50%. The likelihood of a rate cut before last week’s jobs report was about 20% which has since narrowed to less than 10%. Today could prove important to the dollar’s nascent recovery with data due on the influential services sector. Mild moderation is on the cards for the 10 a.m. ET survey. The market also awaits President Trump’s State of the Union address tonight for the latest signals on the U.S.-China trade war. 


The Aussie dollar strengthened against the otherwise firmer greenback, supported by the Reserve Bank of Australia’s first decision of the year. The RBA left interest rates unchanged at a record low 1.50% but its statement sounded less dovish on the outlook, suggesting a somewhat lower risk of the next move being a cut rather than a hike. Improved risk sentiment with stocks and oil higher also buoyed Australia’s resource-driven dollar.


Canada’s dollar weakened below three-month highs as oil softened from two-month peaks. Oil moved below $55, the highest in two months. Downside for the loonie was limited, though, as commodity siblings from Australia and New Zealand outperformed against the greenback. The loonie was the strongest major currency last month after the Fed removed near-term rate increases from the table and oil prices rebounded from 18-month lows of $42 to above $53.

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