Currency Market Analysis

Jan 30, 2020 | Currency Market Analysis

Global Themes

Safe havens and sterling all shot higher, tugging the U.S. dollar below two-month peaks. The yen and Swiss franc rose but sterling was the session star after the Bank of England left borrowing rates unchanged, wrongfooting half the market. Deepening concerns about China’s virus with both fatalities and inflections rising spurred a flight to safety, sending U.S. Treasury yields to fresh multimonth lows. The euro rebounded from two-month lows while commodity currencies tumbled. The loonie and kiwi hit seven-week lows with the Aussie flirting with a three-month bottom. The coronavirus is likely to disrupt Chinese first quarter growth and spell renewed weakness for global growth, potentially derailing nascent signs of stabilization. The Fed this week left interest rates unchanged but flagged concern about the virus impacting U.S. growth, a cautionary stance that increased the likelihood of a dollar-negative rate cut this year. Next up: A report today on U.S. fourth quarter growth.

USD

The U.S. dollar lost ground after data showed the American economy grew at a steady rate of 2.1% during the fourth quarter but growth for all of 2019 proved the slowest (2.3%) in three years. The Fed injected more caution than air into the dollar’s sails after it left interest rates unchanged but flagged China’s virus as a significant concern. The market used the Fed’s caution to pull forward expectations of a rate cut a bit earlier during the second half of the year.

CAD

Canada’s dollar slipped to fresh seven-week lows amid virus-induced risk aversion and oil slumping more than 2% to below $52. Worries about a further slowing in China’s already moderating economy are taking a toll on a wide range of commodity assets, including the loonie. Meanwhile, loonie bulls are treading carefully ahead of Friday’s monthly growth data. To help snap the loonie’s weekly losing streak, it would help if November GDP allays concerns about a slowing economy.

GBP

Sterling ascended after the Bank of England left policy unchanged, a decision that wrongfooted half the market. The 7-2 vote in favor of no change from 0.75% was less dovish than forecasts of a 6-3 count. While less dovish, the BOE was far from hawkish as it downgraded its outlook for growth and now expects the economy to flatline during the final quarter of 2019. The BOE appears to be buying time as it assesses coming data and allows for a leadership change to Andrew Bailey in March.

EUR

The euro rebounded from two-month lows after a cautious Fed put a crack in the dollar’s foundation. The Fed sketched a steady outlook for lending rates. But the Fed took seriously the potential threat that the coronavirus poses to both China and global growth. Consequently, the risk of a Fed rate cut over the latter half of the year increased. The euro also received a lift from euro zone economic sentiment brightening more than expected n January.


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