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Currency Market Analysis

Dec 17, 2020 | Currency Market Analysis

Global Themes

Dollar selling accelerated Thursday as the greenback tumbled to fresh 2020 lows. The euro and sterling climbed to new 2 ½ year peaks with the Canadian dollar flirting with recent highs. The latest blow to the dollar came from the Fed which vowed not to touch policy even if the outlook for the U.S. economy brightens as it now expects. The dollar is also on its back foot as risk assets rally on hopes that Washington may be on the verge of agreeing on fresh stimulus to try to shore up a sagging recovery. Reports suggest that lawmakers may soon clinch a $900 billion aid deal to help households and businesses weather the pandemic. Meanwhile, the U.S. economy today is likely to validate the Fed’s low rate outlook as weekly jobless claims are forecast to remain high around 800,000.


The euro climbed to new 2 ½ year highs as market optimism over U.S. stimulus and Brexit led to broad based trampling of the greenback. The euro was also basking in the afterglow of reassuring data from Germany this week that showed a surprise acceleration in manufacuting activity in December. Next up for the euro: Germany’s Ifo survey Friday of business optimism. Another upside surprise, which is not expected, would help keep the single currency biased higher.


Sterling continued to reflect cautious optimism in the UK and EU striking an elusive Brexit trade agreement in time to avoid import tariffs from next year. The Bank of England is also waiting on Brexit developments which led the UK central bank today to vote unanimously to keep interest rates at record lows of 0.10%. Brexit holds the near term keys to sterling with a further relief rally likely if a deal is reached. A shock no-deal outcome, which hasn’t been ruled out, could send the pound into a precipitous nosedive.


The loonie was perched near recent peaks, its strongest in 2 ½ years, as stocks and commodities pushed higher while the greenback tumbled anew. Upside for the loonie has been slowed a bit after the head of the Bank of Canada this week flagged currency appreciation as a threat to Canada’s export-oriented economy. The currency jawboning from Gov. Tiff Macklem will likely only slow the speed of the loonie’s ascent, not reverse it.


Dollar losses accelerated on more signs of a decelerating recovery. U.S. data was mixed but mostly worrisome, keeping the heat on the greenback. Jobs data continued to veer in the wrong direction as weekly unemployment claims unexpectedly rose to 885,000 in the latest period, the highest in months, from 862,000 the prior week. The sharp jump in weekly claims heightened the risk of the next monthly jobless report being a negative number. On the bright side, housing starts and building permits both jumped more than expected, offering more evidence of the housing market capitalizing on the Fed-inspired low mortgage rate landscape.  

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