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Currency Market Analysis

Oct 21, 2020 | Currency Market Analysis

Global Themes

The greenback wilted to six-week lows in stimulus-driven trade. A broad swoon drove the buck to one-month lows against the euro and yen, and to its weakest in six weeks against the Canadian dollar. The U.K. pound reached one-week highs, a level within pips of early September peaks. The buck is breaking down as hopes build for a breakthrough in stimulus negotiations in Washington. President Trump endorsing a big economic rescue package was the latest catalyst to spur cautious optimism around a deal materializing in the weeks ahead. A bold stimulus package of around $2 trillion, maybe more, is pushing up longer run inflation expectations. Ordinarily as inflation expectations rise so would prospects of higher interest rates. But times have changed with the Fed telegraphing it would be slower to respond to higher price growth given its long struggle to attain its 2% target.  

CAD

Canada’s dollar jumped to six-week highs amid a broad swoon in the U.S. dollar. The weaker greenback largely overshadowed tepid domestic data that suggested a bit less economic pep towards the end of the third quarter. Inflation continued to run cold with a 0.5% annual rise in September, above 0.1% in August but a mere fraction of the Bank of Canada’s 2% goal. Retail sales underwhelmed, rising 0.4% in August versus forecasts of more than 1%. Tame inflation and a cautious consumer suggest a prolonged period of rock bottom interest rates.

EUR

The euro rallied to one-month highs against the broadly weaker greenback. The buck has found a vulnerability in the Fed’s pledge to move slower in responding to higher inflation expectations. Meanwhile, hopes of Washington agreeing on stimulus in the weeks ahead have fanned intermittent bouts of risk appetite, an environment typically supportive of the euro at the haven dollar’s expense.

GBP

Britain’s economic warning lights are flashing red but sterling is in the green. The pound instead is benefiting from the weaker U.S. dollar which hit six-week lows against a basket of rivals. Just below the surface, however, is mounting evidence of a sputtering British economy. Area inflation rose to a still-anemic 0.5% annual rate in September from 0.2% the previous month. But that marked inflation running at less than half of the Bank of England’s 2% goal for the sixth consecutive month. Meanwhile, rising unemployment and new restrictions to slow another wave of Covid inflations have darkened Britain’s growth outlook.


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