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Currency Market Analysis

Feb 04, 2020 | Currency Market Analysis

Global Themes

China injected both liquidity and a tentative sense of calm into markets Tuesday, boosting some of the hardest hit currencies like its own, along with the Aussie, kiwi and Canadian dollars. The greenback held firm thanks to solid gains against safer peers like the yen and Swiss franc. The euro steadied while the U.K. pound stabilized after hitting Christmas lows. China injected more liquidity, nearly $80 billion this week, into its banking system. Chinese markets cheered the news which spread globally, boosting risk appetite. Despite a growing casualty count from the virus, markets are guardedly hopeful that the crisis would be more localized and not widen to an international issue. No declared winner from last night’s Iowa caucuses but political risk could soon enter the greenback’s calculus. Also in focus this week: North American jobs data on Friday that wields the potential to sway the U.S. and Canadian interest rate outlooks.


Canada’s dollar caught a break after falling to two-month lows. Concerns that China’s health crisis would weaken demand for oil have driven crude prices to below $50, the lowest in a year, compared to their 2019 close above $60. Chinese steps such as financial market liquid injections have for now tempered concerns over the crisis. Consequently, global stock and oil markets have rebounded, pulling commodity-exposed currencies higher.  


The market remains one of the best in more than a decade for Aussie dollar buyers. Australia’s dollar stabilized Tuesday after markets cheered steps by China’s central bank to shore up investor morale. It also helped that Australia’s central bank overnight left borrowing rates at 0.75%, a record low. The Reserve Bank seemed to look past the temporary hit to growth from the bushfires and coronavirus. Yet while the RBA signaled a somewhat higher bar to cutting interest rates further, the bar to tightening policy appears even higher. Consequently, meaningful gains are likely to elude the Aussie for a while. 


Uncertainty over whether the transition phase that the U.K. and EU are observing would end amicably at the end of the year gnawed at sterling, sending it to six-week lows. Uncertainty over London and Brussels reaching a trade agreement by year-end overshadowed pound-positive data that showed sentiment among the construction industry brightened more than expected in January which continued a string of more encouraging U.K. data since the country’s December election. 


The euro steadied, albeit toward the bottom of its range, putting it near multimonth lows. The weak state of European growth continues to undercut bouts of euro strength. Late week factory numbers from Germany, Europe’s biggest economy, will be of critical importance for guiding sentiment toward the single currency. 

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