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Currency Market Analysis

Sep 17, 2020 | Currency Market Analysis

Global Themes

The U.S. dollar fared mixed but mostly firmer in central bank-driven trade. The buck rose against the euro and loonie, soared against the U.K. pound but slipped into a deeper, multiweek hole against the yen. Sterling led major currencies lower after the Bank of England left its key rate at record lows of 0.1% but signaled it was a step closer to adopting negative interest rates given the “unusually uncertain” outlook for the U.K. economy. The dollar, meanwhile, emerged stronger after the Fed left policy unchanged and dropped few hints that it was considering more stimulus, disappointing Wall Street which remains in a funk. It also helped the dollar that the Fed now forecasts a less severe downturn this year than it projected over the summer. Still, the Fed’s low rate promise for eons won’t improve the dollar’s anemic yield appeal.


The U.K. pound staged a swoon after the Bank of England dropped clear signals that it was edging closer to implementing negative borrowing rates. A united BOE today voted to keep interest rates at a record low of 0.1%. The big news was that officials were actively studying plans to push rates below zero given the “unusually uncertain” economic outlook. Central bankers noted better data of late but signaled heightened concern related to Covid uncertainty, expectations of a sharp rise in unemployment and potential Brexit shocks.  


Canada’s dollar slipped to one-week lows as the greenback strengthened and markets turned averse to risk. A 0.5% decline pushed oil back below $40. Expectations that domestic data Friday will show retail spending slowed to a 1% increase in July after a record surge of more than 23% in June added to the loonie’s tepid tone.  


The euro fell to one-month lows as markets turned risk averse in the wake of the Fed’s latest policy decision. The greenback, consequently, enjoyed a safe haven lift at the expense of the single currency. Adding to the euro’s weaker bias, area data confirmed that euro zone inflation fell at an annual rate of 0.2% in August, a level far below the ECB’s near 2% goal which can open the door wider to more accommodative stimulus.


The dollar is catching more of a safe haven boost rather than any improvement in U.S. fundamentals, suggesting its gains could be tough to sustain. Adding to the still-shaky state of U.S. economic fundamentals, weekly jobless claims improved less than expected to 860,000. The numbers running at still elevated levels depict a slowing in the pace of job market improvement thereby validating the Fed’s cautious outlook.

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