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Currency Market Analysis

Feb 27, 2020 | Currency Market Analysis

Global Themes

The U.S. dollar slid to multiweek lows as the widening coronavirus epidemic dimmed an otherwise bright outlook for the world’s biggest economy. The buck fared mixed but mostly weaker with losses of 0.50% to 0.75% against the yen and euro. The heavily sold Aussie dollar rebounded from major-trend lows but the greenback climbed to September highs against Canada and notched new 2020 peaks versus emerging market rivals from South Africa and Mexico. The deadly virus has exposed a dollar vulnerability as its widening reach has torpedoed the view that America appeared more immune than other nations to the illness. Treasury yields collapsing to successive historic lows have partly been a safety play into U.S. assets. Still, the yield plunge has dimmed the dollar’s appeal and intensified pressure on the Fed to slash interest rates. Markets have priced a near certainty of a U.S. rate cut by April. 

EUR

A rally to two-week highs allowed the euro to appreciate by two cents from last week’s three-year lows. The spreading coronavirus has led to a growing likelihood of the Fed slashing U.S. lending rates to offset threats to America’s record long expansion. While pressure also is building on the ECB to ease policy, the fact that the Fed has higher interest rates and, therefore, more monetary firepower than Europe has catalyzed a recovery in the euro, albeit one with questionable conviction.

GBP

Sterling flirted with three-month lows as investors took a skeptical view of the UK and EU reaching a pound-friendly trade agreement by year-end. Meanwhile, doubts are on the rise about whether Britain’s new finance chief next month will unveil a budget with extravagant spending to help put the economy on a stronger path. Moreover, the risk of the coronavirus harming growth at home and abroad means a higher likelihood of a pound-negative interest rate cut by the Bank of England this year. 

CAD

Canada’s dollar tumbled to nearly six-month lows as the widening coronavirus epidemic knocked oil prices below $48 to fresh January 2019 lows. The loonie also is bracing for Canada’s fourth quarter economic report card Friday which is forecast to show growth slowed sharply to a 0.3% increase from 1.3% during the third quarter. A downside surprise to Q4 GDP would increase the likelihood of Canada cutting interest rates. At present the market shows about a 40% chance of a rate cut when the Bank of Canada issues its next policy decision on Mar. 4.


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