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Currency Market Analysis

Jan 15, 2021 | Currency Market Analysis

Global Themes

Another gain Friday had the U.S. currency on track for its best week in months. The stronger greenback clocked fresh one-month highs against the euro, strength that lifted it above fresh 2018 lows against sterling and the Canadian dollar. Weaker world markets and renewed risk aversion weighed on the Aussie and kiwi dollars along with emerging markets. Global stocks are on their back foot, unnerved by rising daily Covid rates around the world, including China. Meanwhile, as the dust settles on President-elect Joe Biden’s $1.9 trillion “American Rescue Plan,” Democrats’ razor thin majority in the Senate could make passing the proposal very challenging. Ahead of influential data on the U.S. consumer, the broadly weighted U.S. dollar index was up around 0.5% for the week, its best performance since November.


The U.S. dollar pared gains after shockingly bad news on America’s main growth engine. Retail sales unexpectedly plunged 0.7% in December versus forecasts of a flat reading. The data offered concrete evidence of the pandemic-battered job market leading to a cautious consumer which bodes more bearishly for Q4 growth. The downward trends in spending and hiring emphasize the urgency for the incoming Biden administration to enact bold stimulus to help shore up a wobbly recovery.


The subdued euro was on pace to finish the week behind the dollar and at its weakest level in more than a month. EURUSD has shed a cent, or nearly 1%, in value against the greenback this week as rising U.S. Treasury yields over their European counterparts burnished the greenback’s allure. The euro has also struggled as bold stimulus plans for the next U.S. administration have brightened prospects for a dollar-positive stronger recovery later this year.


Sterling fell from 2018 highs against the greenback as the market focused on the downside of mixed U.K. data. The somewhat less worrisome news came on growth as Britain’s economy contracted 2.6% in November, a fraction of forecasts of a 5.7% fall. Other indicators disappointed as industrial output unexpectedly fell while the trade deficit surprisingly ballooned to more than GBP16 billion. Despite GDP’s better than expected performance, the world’s No. 6 economy is still at an elevated risk of contracting in Q4 and Q1.


The Canadian dollar tumbled from 2018 highs as risk aversion flared, pushing skittish investors into the safety of the greenback. Markets are on edge again over the global spike in Covid rates that’s painting a darkening picture of near-term growth. The Bank of Canada issues its first policy decision of the year on Jan. 20. The market will be all ears to see if low inflation and a moderating job market leads the central bank to play up the potential for a rate cut this year.

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