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Currency Market Analysis

Feb 28, 2020 | Currency Market Analysis

Global Themes

The stampede to safety continued Friday as the rout in global markets showed few, if any, signs of abating. The yen rolled while the Swiss franc soared to September 2018 highs against the greenback. While generally subdued, the U.S. dollar rallied to nearly nine-month highs against Canada and reached 11- and 19-year peaks against counterparts from Australia and Norway, respectively. Riskier emerging markets also endured a drubbing with the Mexican peso at September 2019 lows and the South African rand hitting a mid-2016 bottom. Fears over the coronavirus have many worried about the crisis reaching pandemic portions, a dire scenario that could potentially spell recession for both the U.S. and global economies. The crisis has halted the dollar’s surge to three-year highs as it appears more a question of how aggressively the Fed cuts interest rates rather than if it acts at all.


The euro strengthened overnight to more than three-week peaks and posted higher highs for the sixth straight session. The euro Friday slipped off its peaks due to month-end forces such as positioning and book balancing. The landslide in global equities has allowed some of the year’s worst performing assets, like the euro, to rebound on short-covering.   


The dollar turned higher after data depicted a solid U.S. economy ahead of the global outbreak of the coronavirus. Consumers spent, albeit at a slower pace, incomes rose at the fastest pace in nearly a year, while core inflation inched up to 1.6%. With inflation persistently trailing the Fed’s 2% goal, it won’t stand in the way of central bankers to ease policy by or before their next meeting on March 18. With no bottom in sight for global markets, it could compel the Fed and potentially rivals from Europe, Japan and Canada to act in concert to ease policy to try to put a floor under equities and a roof over bond prices. Doing so might allow the dollar to resume its rise.  


Sterling kept on its back foot as risk-averse players sought higher ground in the greenback, yen and swissie. The pound has struggled this week as the Johnson administration signaled a hardball stance with the EU ahead of trade negotiations that are set to get under way next week. Meanwhile, expectations have receded markedly for Britian’s coming fiscal budget, due on March 11, to show a significant increase in spending. More modest government spending would put the onus on the Bank of England to bolster growth via pound-negative rate cuts.  


Canada’s dollar stuck near September 2019 lows after domestic growth printed in line with forecasts. Growth in the Canadian economy slowed sharply to a 0.3% annual rate from a downwardly revised 1.1% pace during the third quarter. The monthly data suggested the economy had more zip heading into 2020 as December growth increased by 0.3%, a couple ticks stronger than expected. On its own volition the data appeared decent enough to argue against an imminent rate cut by the Bank of Canada. Futures markets this morning point to a more than 60% likelihood of a cut on March 4 from 1.75%, as the rout in global markets intensifies pressure on major central banks to act in concert to try to break the freefall in equities.

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