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Currency Market Analysis

Oct 08, 2019 | Currency Market Analysis

Global Themes

The yen and sterling were the main movers Tuesday with the former in vogue and the latter in hot water. The greenback was generally subdued, led by weakness against the euro, yen and Swiss franc. A downbeat market bias weighed on Canada’s dollar. However, the Aussie and kiwi dollars rose on positioning after recent slides to multiyear lows. Deal doubts are weighing on markets to the benefit of haven currencies. Skepticism remains elevated in the U.S. and China making tangible progress when the leaders sit down for talks later this week. Across the pond, meanwhile, hopes for a compromise Brexit deal between the U.K. and the EU suffered a significant setback on reports that Germany’s leader said an agreement was “overwhelmingly unlikely.” The buck will look for additional cues today from U.S. wholesale inflation and remarks from the Fed chair at 2:30 p.m. ET.

EUR

The euro kept toward the north end of its range, its highest in nearly two weeks. German data today surprised to the upside as industrial output unexpectedly grew, rising by 0.3% in August. The euro is benefiting from risk-off sentiment when skittish investors tend to unwind euro funded carry trades in higher yielding emerging markets. While above its lows, still-subdued sentiment, so far, has limited euro buoyancy, keeping it below a key psychological level. 

USD

Cooler than expected inflation data added to the dollar’s softer session bias and bolstered an already elevated case for the Fed to cut rates again in the weeks ahead. Overall producer prices, a gauge of business prices, slowed more than expected to 1.4% in September from 1.8%. Low inflation will be music to the ear of dovish Fed officials who favor easier policies to coax inflation to optimal levels of 2%. The odds of a Fed rate cut on Oct. 30 increased to about an 80% likelihood from 75% before the data.

GBP

Brexit negotiations hit a sterling-negative snag, sending the U.K. currency broadly lower and to its weakest in a month against the euro. The pound’s more than 0.6% slide knock it to one-week lows against the dollar, putting it a mere pips away from a one-month bottom. Expectations of a volatile week for sterling are materializing after reports indicated that Angela Merkel, the German chancellor, characterized prospects of a compromise Brexit deal as “overwhelmingly unlikely.” While today’s developments will keep alive the risk of a pound-negative disorderly Brexit, the chances of early elections or booting Brexit day further into the future are also likely to increase, explaining sterling’s somewhat limited reaction. 

CAD

The Canadian dollar backpedaled from its highest in nearly a week as skittish market sentiment checked its rise. The loonie had shadowed its Down Under rivals, the Aussie and kiwi, higher, currencies benefiting from positioning after recent slides to multiyear lows. Traction is a bit slippery for the loonie with oil prices down a percent and barely above $52. Better than expected Canadian housing starts data added to the case for central bankers to holding lending rates steady at 1.75%.


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