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Currency Market Analysis

Dec 07, 2020 | Currency Market Analysis

Global Themes

The U.S. dollar weathered global market crosscurrents as it edged up from 2 ½ year lows. The euro and yen steadied near recent peaks while sterling tumbled as Brexit negotiations reportedly entered a critical and potentially climatic conclusion. The Canadian dollar and its commodity cousins from Down Under slipped from two-year highs. Appetite for risk ebbed as Brexit uncertainty and reports of the U.S. imposing more sanctions on Chinese officials overshadowed upbeat data from two of the world’s four biggest economies. China, the world’s No. 2 economy, posted a record trade surplus in November on the back of strong exports. Germany, the fourth largest economy, logged stronger than expected factory growth in October. While firmer, dollar sentiment has deteriorated as traders turn a blind eye to the present and cast a hopeful one to the future when stimulus and a potent vaccine are expected to put the economy on a faster and sustainable path to recovery.


Right after joining the 2 ½ year high club against the greenback, sterling plunged as the UK and EU reportedly entered the final days of negotiations for a Brexit trade pact. The pound tumbled more than 1% as the parties appeared no closer to clinching an elusive trade agreement. Failure to strike a deal this week could set the stage for a chaotic separation after the transition period ends on Dec. 31. A messy exit would threaten to torpedo Britain’s economic recovery which could hasten the Bank of England to push borrowing rates, currently at a record low of 0.10%, below zero. A disorderly split would also leave the pound at risk of a significant, multi-cent swoon.


Canada’s dollar shadowed stocks and oil market down from recent peaks. As a result, the loonie slipped from 2 ½ year highs. The loonie now looks to Wednesday’s policy decision from the Bank of Canada. The central bank has already said that interest rates won’t increase from a record low 0.25% until 2023. Key for the loonie will be whether the BOC plays up expectations of an uneven recovery or if it acknowledges a resilient economy after last week’s better than expected jobs report. An emphasis on the latter would be loonie-positive. 


The euro wavered after it rallied to string of 2 ½ year highs. Downside for the euro was checked by promising news on the German economy as another report on factory growth in October smashed forecasts. The data suggested a solid start to the fourth quarter which is still seen at risk of a double dip downturn amid the latest restrictions to slow the rapid spread of Covid-19. The ECB’s policy announcement Thursday looms very large for the euro and its coming prospects. Key for the euro is what the central bank says or does about its economy-crimping surge to April 2018 highs. 

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