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Currency Market Analysis

Mar 05, 2020 | Currency Market Analysis

Global Themes

Worries about the coronavirus hampering global growth pressured both U.S. stock markets and America’s dollar. The greenback fell against the euro and sterling, and slipped to fresh five- and 18-month lows against the yen and Swiss franc, respectively. Canada’s dollar kept on the defensive a day after the Bank of Canada’s biggest interest rate cut since 2009. The U.S. unit otherwise held within striking distance of six-month peaks against the Mexican peso, its highest since mid-2016 versus the South African rand, and its strongest in more than a decade against the Aussie and kiwi dollars. The coronavirus reaching U.S. shores has toppled the dollar from multiyear peaks as it’s roiled markets, darkened the outlook for growth, and thrust the Fed into action with its boldest rate cut in more than a decade. U.S. jobs data today and tomorrow may hint at the extent to which the Fed eases policy, the dollar’s chief driver.


Another rally pushed the euro toward two-month peaks against the greenback, making its losses for the year negligible. The outlook for transatlantic monetary policy has been a boon for the euro given the limited space for the ECB to ease policy. That’s because key rates are already below zero. Markets are pricing an elevated risk of the ECB next week delivering a mere 10 basis point rate reduction, a move that would lower its key rate to minus 0.60%. 


Sterling rose to one-week peaks, boosted by dollar weakness and remarks from the next head of the Bank of England that sounded a less dovish tone, calling on the government, not just the central bank to support growth. Andrew Bailey will succeed Mark Carney as central bank governor on March 16, ten days before the bank’s next policy announcement on March 26. Still, markets are pricing a high likelihood of Mr. Bailey cutting rates from 0.75% soon after he assumes the helm given threats to U.K. growth from the coronavirus and persistent Brexit uncertainty. 


The dollar index fell to new eight-week lows as it took its main cue from risk sentiment being in the doldrums. That overshadowed constructive data on the U.S. job market. Fewer weekly jobless claims (216K vs the previous 219K) were consistent with a strong labor market. That’s a reassuring sign ahead of tomorrow when nonfarm payrolls are due. Solid hiring, low unemployment and an uptick in wages are on the cards. So far the U.S. economy has shown few cracks yet from the coronavirus. If that trend continues Friday it could alleviate pressure on the Fed to deliver big rate cuts, a scenario that could boost the weary dollar. 


Canada’s dollar dangled close to nine-month lows the morning after the Bank of Canada’s biggest interest rate cut since 2009. Canada’s central bank slashed rates by a whopping 50 basis points to 1.25% to offset downside growth risks from the coronavirus. The bank also dialed down expectations for first quarter growth. USDCAD has kept to the range though given that the outlook for U.S.-Canadian monetary policy appears on a similar path.

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