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Currency Market Analysis

Jan 07, 2020 | Currency Market Analysis

Global Themes

The U.S. dollar rebounded from multimonth lows as fears of a major conflict between Washington and Tehran receded. Across the board gains lifted the dollar out of its biggest hole in months versus counterparts from Europe, Japan and Canada. Australia’s dollar tumbled more than 1% to mid-December lows, as the country’s deadly fires strengthened the case for the Reserve Bank to cut interest rates to fresh lows as soon as February. Market eyes remain on Iran and its anticipated response to the killing of its top military leader. While the situation isn’t out of the woods yet, the fact that oil markets have flexibility to ramp up production in the event of a supply shock has helped to limit the fallout. On tap today are trade numbers from the U.S. and Canada, and readings on America’s factory and services sectors. 


Sterling fell as geopolitical uncertainty abated enough to spur some buying of the U.S. currency. Brexit remains a thorn in the pound’s side as last year’s developments, including a landside election win for Prime Minister Boris Johnson that gave the Conservative’s a strong majority in Parliament, failed to remove from the table the specter of a no deal exit from the EU. That explains the pound’s 4-cent retreat from recent 1 ½ year highs. 


The stronger U.S. dollar received an added boost from the latest trade data that showed the smallest deficit in years. America’s trade gap narrowed more than expected to $43.1 billion in November, the lowest since late 2016, from a downwardly revised deficit of $46.9 billion in October. The smaller shortfall should exert less of a drag on fourth quarter growth. The week’s main economic event looms Friday when U.S. unemployment is expect to remain at a 50-year low of 3.5%.


Canada’s dollar hit session lows as oil weakened and the greenback strengthened. The loonie was little moved but data that showed Canada logged a C$1.09 billion trade deficit in November which was down from a revised shortfall of C$1.61 billion in October. The trade gap will put a headwind on fourth quarter growth which if it slowed enough could revive expectations of a local rate cut this year. A 0.7% decline in oil pushed prices below $63. 


The euro failed to get a rise out of higher inflation across the euro zone. The bloc’s rate of inflation accelerated at a 1.3% annual pace in December, the highest in six months, from 1%. While central bankers will cheer the news, they’re unlikely to pull forward plans to lift interest rates from crisis lows given that meaningful price growth appears on a very distant horizon. Higher inflation may be hard to sustain given lackluster global growth.

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