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Currency Market Analysis

Feb 05, 2020 | Currency Market Analysis

Global Themes

Dollar cheers data, notches new highs

America’s dollar fared mixed but mostly firmer as worries about China’s virus receded. The dollar rose against the euro and climbed to two-week highs against the safer bet Japanese currency. Sterling caught a data boost while improved risk appetite buoyed currencies like the Aussie, kiwi and Canadian dollars. It’s far from clear what the impact will be on Chinese and global growth from the coronavirus. But markets are taking comfort from steps by Beijing to limit the economic damage such as providing lavish liquidity injections to its banking sector to help spur borrowing and spending in a bid to try to stave off a material slowdown. The rise in risk tolerance put upward pressure on U.S. Treasury yields, boosting the dollar’s allure. The greenback was spotted an early session lead whose longevity may hinge on U.S. data today on employment, a precursor to Friday’s more important January nonfarm payrolls report.


Sterling briefly inched off six-week lows after data showing the strongest U.K. services growth in more than a year last month validated the Bank of England’s decision not to cut interest rates. Britain’s services sector does most of the heavy lifting for the U.K. economy. Consequently, the upward revision to the services PMI to 53.9 in January, the highest since September 2018, offered evidence of a post-election shot in the arm for Britain’s slow-growing economy. 


The buck is finding twin tailwinds in upbeat data and higher yields. The dollar index scaled new two-month peaks after ADP job growth surged by more than 290,000 in January, the most since mid-2015. The economy’s strong showing this week bolstered optimism for more good news Friday when America releases its more important nonfarm payrolls report for January. A mix of healthy hiring, low unemployment and wages moving higher would pour cold water over prospects of more insurance rate cuts by the Fed.


The euro lagged behind the dollar and sterling, two currencies that received data-inspired lifts. EURUSD was back near two-month lows after data painted a better picture of growth on the left side of the Atlantic than to the right. Euro zone retail sales proved far weaker than expected with the 1.6% plunge in December. By contrast, America’s ADP report of private sector hiring smashed forecasts with a print of 291,000 in January, the most since May 2015. The data potentially sets the stage for another upbeat U.S. government jobs report on Friday. 


The loonie remained subdued and near two-month lows despite stronger oil and a smaller trade deficit. Broad based gains in the greenback eclipsed news that Canada logged a trade gap of C$370 million in December which was down from a revised shortfall of C$1.20 billion the month before. The smaller deficit will exert less of a drag on fourth quarter growth but it won’t stand in the way of a potential Bank of Canada rate cut by the middle of the year. 

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