Currency Market Analysis

Dec 11, 2019 | Currency Market Analysis

Global Themes

The U.S. dollar rose on caution ahead of a slew of event risks. Broad gains lifted the greenback against the euro, sterling and Canada’s dollar. The yen idled. Elsewhere, Sweden’s krona soared to multimonth peaks, while the Aussie and kiwi dollars strengthened, along with emerging markets, on the perception that America won’t increase tariffs on China in the days ahead. Markets have one eye on central banks and the other on Britian’s election tomorrow. The Fed today is expected to leave rates unchanged after cutting them three times since July. The mixed but overall solid shape of the U.S. economy could see America’s central bank telegraph a steady-as-she-goes outlook for borrowing rates which would leave intact a dollar-positive yield advantage. The Fed’s decision, and its new forecast for growth and interest rates, is due at 2 p.m. ET.

EUR

The euro edged down after bumping its head near the top of the range. The single currency caught a bounce higher this week after stronger data from Germany fed the narrative that the bloc’s biggest economy was past the worst of a slowdown that had it flirting with recession. Appetite for the euro also moderated on caution ahead of the new-look ECB’s first meeting Thursday under its new president, Christine Lagarde. Anemic inflation suggests the Lagarde-led ECB will maintain its cheap credit policies to spur faster borrowing and spending to strengthen growth.

CAD

Canada’s dollar was virtually steady, albeit with a subdued bias due to oil-market weakness. The loonie saw little reaction to news that Canadian industries ran at a slower pace of capacity in the third quarter. Key for the loonie’s coming prospects will be the outcome of the Fed meeting today, and tomorrow when the head of Canada’s central bank speaks. Mr. Poloz’s remarks may carry extra weight after Canada’s shockingly weak jobs report last week.

USD

Supporting the buck’s overnight rise, numbers on U.S. inflation rose more than expected, cementing the case for the Fed to hold fire on further rate cuts. Consumer prices rose at an annual rate of 2.1% in November after increasing by 1.8% the month before. The Fed today is expected to take a breather after cutting lending rates at its last three meetings. America’s economy, while mixed, remains in overall solid shape. Unemployment running at a 50-year low bodes well for continued consumer spending. How dovish or hawkish the Fed is perceived today will help set the tone for the buck’s performance into next year.

GBP

Sterling emerged steady after a volatile night of trade. Thursday’s much-anticipated election is not just about Brexit – it’s increasingly become a socioeconomic matter. The state of Britian’s health care system has come into focus, adding another layer of uncertainty. While steady, the pound would be vulnerable to any election outcome that stops short of a Conservative majority. Sooner or later after the vote the spotlight should shift to the weak state of Britain’s economy that may require more stimulus from the Bank of England.


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