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Currency Market Analysis

Mar 04, 2020 | Currency Market Analysis

Global Themes

Dollar buoyed by Biden’s Superb Tuesday

The U.S. dollar recovered from multimonth lows as attention shifted abroad where other central banks could soon lower interest rates. The dollar rose above two- and five-month lows against the euro and yen respectively, but weakened against the Canadian dollar. The dollar index had tumbled to eight-week lows after the Fed shocked and awed with an aggressive 50 basis point cut that lowered rates to roughly 1.1% from 1.6%. The central bank spotlight today has moved north where the Bank of Canada is likely to cut rates for the first time since mid-2015 to bolster an economy that barely grew last quarter. The loonie could strengthen if Canada cuts rates but opts for a more modest 25 basis point easing to 1.50%.


The pound was little moved by data that confirmed slower U.K. services growth this month. Britain’s leading services industry PMI slowed to a 53.2 pace from 53.9 in January. Sterling failed to capitalize on the dollar’s Fed-induced decline with markets pricing a higher likelihood of the Bank of England cutting borrowing rates from 0.75% on March 26. 


The dollar index rose above eight-week lows, buoyed by Biden’s big turnaround and stronger than expected jobs data. ADP reported that private employers added 183,000 jobs in February, above forecasts of 170,000. The data offers hope for another solid month of hiring for Friday’s nonfarm payrolls report. Good news on the economy Friday could buy the Fed some time to hold fire on subsequent rate cuts that have proven the secret sauce behind the dollar’s collapse from multiyear peaks.


The loonie weathered for now growing expectations for Canada to cut borrowing rates as soon as today. Markets sense a near-certainty of Canada slashing borrowing rates given that the coronavirus has caught the nation’s economy at a vulnerable time. Canada’s economy grew at the slowest pace (0.3%) in more than three years last quarter. A modest rate cut of 25 basis points to 1.50% would maintain a loonie-positive yield advantage over the greenback. But if Canada should cut and deliver an aggressive 50 basis point reduction and sound amenable to further action, the loonie could suffer and potentially test fresh multimonth lows. 


Wall Street futures signaling a positive start to the day put a brake on the yen’s surge to five-month highs. Reduced appetite for safety in the yen, coupled with Joe Biden’s literally super Tuesday, translated into support for the U.S. currency. Mr. Biden’s strong showing Tuesday catapulted him back into the race for the Democrat Party’s nomination. Mr. Biden’s more moderate stance is perceived as more market-friendly compared to left-wing rival Bernie Sanders. Underlying yen sentiment remains strong given elevated worries about the coronavirus weakening global growth. 


Improved risk tolerance coaxed the euro below two-month peaks. The euro’s spectacular rally over recent weeks allowed it to momentarily erase its 2020 loss against the greenback. The euro pushed higher after the Fed Tuesday delivered an unscheduled and bold rate cut to about 1.1% from 1.6%, a move that narrowed the dollar’s favorable yield advantage. The ECB will be in the limelight next week with markets pricing an elevated risk of the central bank pushing lending rates further below zero to support sluggish growth from the ill effects of the coronavirus. 

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