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Currency Market Analysis

Feb 19, 2020 | Currency Market Analysis

Global Themes

This major currency today is faring worse than the euro

The U.S. dollar rose to new highs but its strength was uneven as improved risk sentiment buoyed the Aussie, kiwi and Canadian dollars, along with emerging markets. The euro lurched to new April 2017 lows as it continued to flounder in the wake of renewed signs of a moderating European economy. The yen crashed to nine-month lows as higher stocks tempered demand for safer bets. Moreover, Japanese data earlier this week showing the largest quarterly contraction in years last quarter bolstered expectations of prolonged and perhaps stepped up stimulus from Tokyo. Concerns about the global economic fallout from the coronavirus are being eclipsed today by expectations for Beijing to stimulate its way out of the crisis. On tap for the North American day are inflation figures from Canada and the minutes of the Fed’s last meeting.


The euro slumped to new April 2017 lows, weighed down by growing concerns about the health of the 19-nation euro zone. The euro may not be out of immediate danger to the downside before Monday when Germany issues its influential Ifo survey of business confidence. Bearish sentiment continues to leave the euro vulnerable to selling when it bounces. 


The U.K. pound weakened as its politically-inspired gains over recent days faded. Downside for the pound has been limited by hopes that the British government next month may unleash bold fiscal stimulus to steady the nation’s Brexit-dented economy. Doing so would reduce pressure on central bankers to pursue pound-negative lower interest rate policy. Numbers today showed that British consumer inflation increased at a 1.8% annual rate in January which topped forecasts by a couple ticks though held below the Bank of England’s 2% goal. 


Today’s weakest major currency is the yen whose nearly 1% tumble knocked it to May 2019 lows against the greenback. The yen is losing favor as players wade, albeit cautiously, into riskier waters and away from safer ground. The yen, though, is also feeling the residual effects of Japan’s disastrous fourth quarter growth when it contracted by 6.3%, its weakest in years. The data painted a worrisome picture of growth at the outset of 2020, potentially paving the way for stronger central bank stimulus. 


Constructive U.S. data validated the dollar’s upturn to new highs. Housing starts proved better than expected last month while a gauge of business prices increased more than expected, supporting the Fed’s view of inflation moving up to its 2% goal. All eyes today will be on the 2 p.m. ET release of the minutes from the Fed’s last meeting in late January. The minutes should shed light on the level of policymakers’ concern over the coronavirus. Minutes that depict a central bank content to remain on the sidelines for some time yet would bode well for continued dollar gains. 


Improved risk tolerance, higher oil and warmer domestic inflation all conspired to lift the Canadian dollar to 2 ½ week peaks. Headline inflation jumped more than expected to a 2.4% annual rate in January, two ticks above December and some four above the Bank of Canada’s 2% goal. However, a gauge of core inflation that the central bank watches to guide its policy outlook slowed to a 1.8% pace from 2%. On balance, the data kept a high bar in place for Ottawa to lower interest rates from 1.75% anytime soon.  

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