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Currency Market Analysis

Oct 17, 2019 | Currency Market Analysis

Global Themes

The U.S. dollar tumbled broadly, hitting late August lows, after Britain and the EU moved a big step closer to an orderly Brexit. The dollar slid to one- and five-month lows against the Canadian dollar and U.K. pound, respectively, and flirted with two-month lows against the euro. Global markets cheered news that Britain and Brussels had reached a tentative agreement that would allow the former to exit the bloc in orderly fashion. While encouraging, more challenges remain. Any deal would require ratification in Britain’s divided Parliament and Northern Ireland has already signaled a thumbs down. U.K. lawmakers are expected to vote on any Brexit deal Saturday. If Parliament passes a deal, sterling could be in the early innings of rally. But if a Brexit deal doesn’t win parliamentary approval it could spark another selloff in sterling. Meanwhile, mounting signs of a slowing U.S. economy added another headwind on the greenback.


The yen sank to 2 ½ month lows against the greenback as markets breathed a sigh of relief that Britain moved a big step toward an orderly exit from the EU two weeks from now. The Brexit situation remains fluid and faces more challenges. Should an orderly Brexit come to fruition it could spell a marked decline for the yen, a safer currency that has benefited from significant U.K.-related uncertainty. 


Sterling endured more stomach-churning volatility as it swung within a 2 ½ session range in Brexit-driven trade. Sterling soared to fresh five-month highs after news broke that Boris Johnson had reached a tentative Brexit agreement with the EU, thereby setting the stage for an orderly exit in two weeks’ time. However, doubts about any deal receiving parliamentary approval caused the pound to pare its gains. Moreover, sterling’s inability to break above a key psychological level spurred some profit-taking. Saturday is shaping up to be a showdown in the U.K. Parliament if indeed Mr. Johnson brings home a Brexit deal. The possibility of a meaningful Brexit vote over the weekend could see the pound gap sharply higher or lower once markets reopen next week. 


The dollar index neared two-month lows with the main weight stemming from hopes of a Brexit deal taking shape. Mounting signs of a weakening U.S. economy also added to renewed dollar vulnerabilities. A day after retail spending fell for the first time since early this year, data showed a rise in weekly jobless claims, albeit to still low levels, and slower than expected growth in the Philly Fed index, a gauge of Mid-Atlantic business activity.


Riding sterling’s coattails, the euro powered to late August highs against the greenback. A Brexit agreement, if approved by the EU and the U.K. Parliament, would reduce uncertainty that has contributed to Europe’s economic slowdown. While stronger, the euro likely has a way to go to bolster confidence that it’s formed a meaningful bottom. 


Canada’s dollar climbed to five-week peaks, boosted broad-based weakness in the U.S. dollar and more signs of a resilient Canadian economy. Data on Canadian manufacturing sales showed a better than expected rise of 0.8% in August, good news that signals a closed door to a rate cut by the Bank of Canada when it renders its next policy decision on Oct. 30. Gains for the loonie were slowed somewhat by weaker oil markets with crude wavering around $53.

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