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Currency Market Analysis

Dec 09, 2020 | Currency Market Analysis

Global Themes

Weak dollar dynamics were on display Wednesday with the U.S. currency anchored near multiyear lows. Sterling led gains against the greenback on flickering hopes that Brexit negotiations this week might yield an elusive trade agreement. The euro and Canadian dollar both held firm near 2 ½ year peaks. The dollar has wilted into year-end on hopes that eventual stimulus from Washington and deployment of a vaccine would put the world’s biggest economy on a path to normalcy next year. The buck’s weak bias could get a central bank jolt ahead of policy decisions today and tomorrow by Canada and the ECB, respectively. Any pushback against domestic currency appreciation could at the very least help to slow the greenback’s descent. The Fed and Bank of England are in focus next week.

CAD

Canada’s dollar hovered within pips of 2 ½ year peaks ahead of today’s policy decision from the Bank of Canada. The BOC has already vowed to maintain record low lending rates of 0.25% for years to come. Key for the loonie will be whether policymakers acknowledge its economy-crimping strength. Flagging the loonie as a threat to a sustained economic rebound would likely take some oxygen out of its rally. Still, the outlook remains bright for the loonie on hopes that a vaccine would pave the way to economic normalcy from next year.

GBP

Sterling notched its first gain of the week, a sign of underlying confidence in Britain and the EU reaching a last-minute Brexit deal that avoids market turmoil and tariffs next year. Negotiations may hinge on a dinner meeting tonight between British Prime Minister Boris Johnson and European Commission President Ursula von der Leyen. Sterling should serve as a barometer in prospects of a deal. The pound is expected to strengthen towards, and possibly beyond, recent 2 ½ year peaks if the a trade pact is clinched. No deal would set the stage for a meaningful slide in sterling.

EUR

The euro hovered around 2 ½ year highs against the greenback on the eve of the ECB’s final policy meeting of the year. The 19-nation central bank Thursday is expected to beef up stimulus to help steady an economy that’s at risk of a double dip downturn. The ECB has a tall task if it aims to put a lid on euro appreciation. With interest rates already pinned at crisis lows, the central bank is expected to increase both the size and duration of its QE stimulus. Having gained 8% in 2020, EUR/USD is on pace for its best year since 2017.


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