Currency Market Analysis

Dec 13, 2019 | Currency Market Analysis

Global Themes

The U.S. dollar was among the initial casualties of Boris Johnson’s landslide victory in the U.K. election. In a broad swoon, the greenback tumbled to one- and four-month lows against the loonie and euro, respectively, and crashed to 1 ½ year lows versus sterling. Meanwhile, constructive trade developments with the U.S. and China seemingly on track for an imminent phase one deal hoisted the Aussie and kiwi dollars and emerging markets to mid-2019 peaks. In a resounding win against Labour, Boris Johnson easily won Britain’s election with his Conservative Party gaining its biggest majority in decades. The win set the stage for Brexit next month and marked a significant reduction in political risk that has weighed on sterling and the U.K. economy. Risk-on sentiment prevailed, getting an added boost from the Fed’s sky-high bar to a rate hike and the ECB acknowledging fewer downside risks facing the euro zone economy.

EUR

The euro soared to four-month highs against the greenback as it caught a piece of sterling’s tailwind. Hopes of a market- and economy-friendly conclusion to Brexit will reduce headwinds on the euro zone economy. The single currency also benefited from the new ECB chief, Christine Lagarde, who this week acknowledged a reduction in the downside risks facing the 19-country economy. The euro will need a trend of better data to sustain and extend its upturn to August highs.

JPY

A global risk party spurred an unwinding of safe haven bets on the Japanese currency, sending it to nearly two-week lows against the greenback. Upbeat words from central bankers, and constructive turns for both Brexit and the U.S.-China trade war sparked a beeline into riskier waters and away from defensive assets. Global yields shot higher, making dollar-denominated assets more alluring than Japan which is deploying rock-bottom rates to boost the world’s No. 3 economy.

USD

The dollar pared losses after another solid look at the U.S. economy. Retail sales rose by 0.2% in November with the previous number enjoying an upward revision to 0.4% from 0.3%. While short of forecasts of a 0.5% increase, the outlook for spending remains rosy thanks to unemployment running at 50-year lows. Meanwhile, a rise in import prices should allay concerns about stubbornly low inflation, the obstacle to higher interest rates.

CAD

Canada’s dollar climbed to five-week highs as global markets rallied. Oil touched $60 for the first time since September, underpinning commodity assets. A dispersing of the political headwinds, like Brexit and trade wars, that have weighed on the world economy bodes well for countries, like Canada, that depend on exports as a leading growth engine.

GBP

The big majority win for Boris Johnson’s Conservative Party has game changing potential for the pound. Mr. Johnson’s landslide win cleared the way for Brexit next month and will go a long way in reducing uncertainties that have dogged sterling and restrained U.K. growth. Lots of questions remain such as how soft or hard of a Brexit the prime minister will pursue. But the sense that the days of impasse and indecision over Brexit are behind Parliament bodes bullishly for sterling. Sterling rallied as much as 2.5% to May 2018 highs and this week’s developments kicked open the door to a higher range.


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