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Currency Market Analysis

Oct 29, 2020 | Currency Market Analysis

Global Themes

The U.S. dollar remained buoyant amid broad based risk aversion. The dollar was at or near 10-day peaks against the euro and sterling while the Canadian dollar flirted with one-month lows. The yen continued to defy general strength in the greenback as it too outperformed as investors sought safety. Market sentiment remained in the doldrums after Wall Street’s big selloff the previous day when the Dow plunged more than 900 points or 3.4%. The surge in coronavirus infections and the resulting lockdowns have dimmed prospects for a sustained global rebound from the pandemic-induced recession. Uncertainty has been heightened by America’s fast-approaching presidential election next week. Meanwhile, caution ahead of an ECB policy decision shortly and data on U.S. third quarter growth has compounded instability. Spectacular third quarter growth is expected to give way to a sharp slowdown in the current quarter.

GBP

A subdued U.K. pound stuck close to 1 ½ week lows against the stronger greenback. Persistent risk aversion has steered skittish investors away from sterling to safety in the dollar. Moves to the downside in sterling have so far proven muted, given pound strength against the euro and still flickering hopes of the U.K. and EU forging some sort of trade agreement by year-end that avoids economy-denting tariffs next year.

EUR

The euro descended to 10-day lows on caution ahead of a policy update from the ECB. While the ECB is expected to hold fire on stronger stimulus today, it could set the stage for action by December given the sharp spike in Covid cases in the bloc’s biggest economies like Germany, France and Italy. A dovish message that emphasizes downside risks to growth could be the euro’s ticket through another floor.

CAD

Canada’s dollar flirted with one-month lows as oil added to the previous day’s plunge when prices shed more than 5% and after the Bank of Canada signaled no interest rate hikes until 2023. Oil tumbled more than 4% early Thursday to $35 as accelerating Covid infections boded negatively for energy demand. The BOC’s low rate vow for years to come while dovish may not prove a loonie game changer, considering that central banks Down Under are seen on a more dovish path and seemingly poised to ease policy further over the short run.

USD

The dollar held gains after better than expected news on the U.S. economy. Third quarter growth soared by a record smashing 33.1% annual rate, above forecasts of 31%. Weekly jobless claims improved more than expected to a still high 751,000 from a revised 791,000. The growth data is as spectacular as it’s likely to prove short-lived which suggests it won’t add meaningful traction to the dollar’s rebound. The economy is now contending with stiff headwinds related to the surge in Covid cases, slower hiring and the expiry of government stimulus. Forecasts call for a sharp slowdown in Q4 growth to around 4%.


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