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Currency Market Analysis

Nov 15, 2019 | Currency Market Analysis

Global Themes

America’s dollar was mixed but mildly subdued ahead of key data today on the U.S. growth engine: The consumer. While up against the yen and Swiss franc, the buck softened against the euro, Canada, Australia, and emerging markets. The U.K. pound was little changed. Markets were in a cautiously upbeat mood Friday after a senior official of the Trump administration, Larry Kudlow, said the U.S. and China were “getting close” to a trade deal. The reassuring rhetoric, coupled with markets’ heightened sensitivity to all things trade, was enough for investors to dip a toe into riskier waters. Retail sales are forecast to bounce back with a 0.2% rise in October, compared to September when spending fell at the fastest rate in months. It would likely take an impressive number to overshadow political risk associated with the impeachment inquiry, an evolving vulnerability for the dollar.


While flat Friday, the U.K. pound was poised to finish the week in the win column against the greenback. Expectations of a majority win for Conservatives in next month’s election have buoyed the pound and overshadowed a week of mostly disappointing data on the U.K. economy. A win for Mr. Johnson and his Tory party could offer much-needed clarity on the next steps for Brexit. While unemployment decline to decade-plus lows, consumer spending contracted despite the lowest U.K. inflation in three years.


America’s main growth engine bounced back as retail sales rose by a stronger than expected 0.3% in October. The consumer comeback last month erased the 0.3% decline in September which was the weakest in seven months. The dollar saw little initial traction from the encouraging data as it was accompanied by another tepid inflation report. Import prices fell by 0.5% in October, a product of dollar strength. Today’s data, on balance, is consistent with a high bar for the Fed to cut but an even higher bar for the central bank to raise rates. Meanwhile, the buck is showing some vulnerability to the impeachment inquiry which is stoking dollar-negative political uncertainty.


The euro rebounded from one-month lows, helped by Germany eluding recession and political risk stalking the greenback. Still, Europe’s fragile fundamental backdrop suggests limited scope for euro appreciation. At 0.7% in October, data today confirmed that euro area inflation continued to run at a dangerously low level below 1%. Chronically low inflation will keep the new ECB president, Christine Lagarde, up at night and keep the central bank’s door ajar to stronger stimulus.


Tentative trade optimism lifted the Canadian dollar out of its biggest hole in a month against its U.S. counterpart. Gains, though, were limited as lower oil prices checked the loonie’s rise. A few constructive words about the trade story was enough to whet appetite for trade-sensitive currencies, boosting the likes of the commodity trio for Canada, Australia and New Zealand, and emerging markets. Look for Canada’s interest rate debate to intensify next week when numbers come due on inflation Wednesday and consumer spending Friday.

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