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Currency Market Analysis

Jan 13, 2021 | Currency Market Analysis

Global Themes

The greenback righted itself after its rally to multiweek peaks suffered a setback Tuesday. The buck was stronger against most of its peers Wednesday as Treasury yields steadied around elevated levels, bolstering its allure. Still, the dollar played the middle ground between recent tops and nearly three-year lows. The pop in the 10-year Treasury yield above 1% has put a firmer floor under the dollar. Yet the Fed’s vow not to raise interest rates for a long time yet has kept a fairly low ceiling over the buck. Stocks tentatively coming off a boil have also translated into support for the greenback. Meanwhile, a chaotic political backdrop in Washington where many lawmakers are pushing for a historic second impeachment of the president threatens to dampen investor confidence. Slightly higher, though still tame, U.S. consumer inflation is on the cards for today.


The U.S. dollar maintained a gain after underlying American inflation remained tame. Core consumer prices grew at a steady annual rate of 1.6% in December, below the Fed’s bullseye of above 2%. Benign inflation will reinforce the Fed’s low rate stance, a dovish bias with a tendency to cap dollar gains.


Sterling continued to draw residual support from official U.K. central bank speak that walked back expectations of a near-term use of negative borrowing rates. The prospect of negative rates has weighed on the pound. But the weak shape of the British economy suggests that the door hasn’t been entirely closed to rates falling from a record low of 0.1% to below zero later this year.  


The loonie was mostly flat as the firmer greenback was offset by buoyant oil. Crude held above $53, the highest level in 11 months, which supported oil-linked currencies like the Canadian unit. The loonie has settled into a range ahead of a coming Bank of Canada policy meeting on Jan. 20. The market will pay heightened attention to the BOC to see if last week’s poor jobs report tilted the central bank in a dovish direction and put a rate cut on the table.


The euro squandered a Tuesday rally as global markets turned a bit skittish, leading to renewed appetite for the safer greenback. With the single currency taking its cues from market sentiment, it failed to capitalize on better than expected local data. Euro zone industrial production easily topped forecasts with a 2.5% jump in November. The data depicted the 19-nation economy on somewhat of a firmer footing ahead of renewed lockdowns to limit the spread of the virus.

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