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Currency Market Analysis

Feb 11, 2020 | Currency Market Analysis

Global Themes

The U.S. dollar did the two-step to new highs Tuesday. The dollar strengthened against the euro and yen but took one step back versus counterparts with close ties to global growth like the Aussie, kiwi and Canadian dollars. Emerging markets also bounced thanks to a friendlier backdrop for risk-taking amid a moderation in coronavirus concerns. Britain’s economy stagnated last quarter, though sterling firmed. The dollar has thrived of late given its safe harbor standing, U.S. economic outperformance and its yield advantage. After pushing to new October highs, the dollar steadied on caution ahead of congressional testimony today and tomorrow on the U.S. economy by Fed Chairman Jerome Powell. Market players will be all ears for Mr. Powell’s assessment of the risks facing America’s record-long expansion. Any increased expression of concern would bolster prospects of a rate cut later this year, a scenario that could trip the dollar.

USD

The dollar added to its gains after the release of Mr. Powell’s testimony which depicted the central bank remaining firmly on the sidelines. The transcript of Mr. Powell’s congressional testimony acknowledged that the central bank was “closely monitoring” the coronavirus as a potential threat to America’s record-long expansion. Dollar bulls took comfort from Mr. Powell voicing optimism about inflation moving toward the central bank’s 2% goal in the months ahead. Higher inflation would give the Fed less latitude to cut interest rates. Mr. Powell speaks at 10 a.m. ET followed by a Q&A session with lawmakers.

GBP

Sterling edged up from 2 ½ month lows, though upside remained a challenge after data showed Britain’s economy flatlined during the fourth quarter. While no cause for celebration, the pound seemed to benefit from the fact that U.K. growth slightly quickened in 2019 to a 1.4% annual rate from 1.3% in 2018. And while area growth stagnated last quarter, it fared better than France which contracted during the same period. Key for both the pound and the U.K. economy will be whether growth regained steam in early 2020 which would speak to the interest-rate outlook.

CAD

Canada’s currency stabilized from four-month lows as risk appetite improved and oil markets strengthened. A light week for Canada’s economy has put the focus almost exclusively on global market sentiment. Nascent signs of a moderation in the spread of the coronavirus served as a green light for traders to dip a toe into riskier waters, lifting commodity assets like the loonie given Canada’s status as a leading producer and exporter of oil. A more than 1% rally lifted crude prices back above $50.

EUR

The euro fell to new four-month lows against the greenback ahead of remarks today by the Fed chief. Jerome Powell could voice renewed concern over the outlook for global growth in the wake of the coronavirus which has dominated market attention since the Fed last met in late January. Still, Mr. Powell is likely to signal that the Fed intends to remain on the sidelines indefinitely as it monitors incoming data and what it suggests about the economy’s underlying health.  


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