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Currency Market Analysis

Oct 11, 2019 | Currency Market Analysis

Global Themes

No Brexit deal yet for Britain but sterling is behaving like one’s been reached. The pound followed up its best day in months with more impressive gains on hopes that a compromise Brexit deal may be taking shape. Sterling’s massive, more than 3% gain came at the greenback’s expense as the U.S. unit declined nearly across the board. The euro and other trade-linked currencies like the Aussie, kiwi and Canadian dollars also shot higher against America’s buck. The nascent air of optimism over Brexit collided with hopes that trade talks in Washington might yield progress. While the greenback slid broadly it jumped to two-month peaks against the yen, another safer bet that lost ground on improved risk tolerance. While markets are cheering hopes for Brexit and U.S.-China deal progress, any setbacks in talks would risk an unraveling of recent gains, a scenario that would tend to swing the pendulum back in the dollar’s favor.

CAD

The loonie soared after Canada let loose another impressive jobs report that all but closed the door to lower interest rates. All of the more than 50,000 jobs that Canada added in September where the more meaningful full-time positions. That compared to forecasts of a gain of 10,000. The hiring surge lowered unemployment from 5.7% to 5.5%, a mere tick above four-decade lows. The icing on the cake was that wages rose at a faster clip, boding better for consumer spending, a key growth engine.

EUR

The euro climbed to three-week highs against the broadly weaker greenback. Sterling’s several cent rally against the greenback over the last 24 hours also had positive knock-on effects for the euro. The euro would stand to gain if Britain reaches a compromise deal with the EU that helps smooth its exit from the bloc as it would allay wider European economic headwinds. The dollar’s loss of strength only masks euro vulnerabilities stemming from a weak economy that for now have been shifted to the backburner.

GBP

Sterling shot some 4 cents above Thursday’s lows, putting the pound on pace for its best two-day gains in years. A few optimistic words from the U.K. and Irish leaders this week on chances of a compromise Brexit deal have excited sterling bulls. While a new deal hasn’t officially been clinched yet, talk of a ‘pathway’ to one has markets reconsidering the likelihood. Add it all up and it’s helped to squeeze the pound higher as its rise leads more and more sterling bears to run for the exits. The warning to GBP buyers is that if indeed Britain should exit the EU on time in late October and with a deal that smooths its exit sterling could be in line for even larger and potentially sustainable gains.


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