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Currency Market Analysis

Jan 21, 2021 | Currency Market Analysis

Global Themes

Hopes for stronger stimulus from Washington boosted risk markets at the expense of the greenback. The trade-weighted U.S. dollar index fell to one-week lows, pushing the euro higher and keeping sterling and the loonie around multiyear peaks. Markets are betting anew that President Joe Biden would push the Democrat-led Congress to deliver trillion dollar-plus stimulus to shore up a wavering recovery. The buck’s sheen has also been dulled a bit by Treasury yields showing nascent signs of peaking. As expected, the European Central Bank left monetary policy unchanged. The loonie held aloft near April 2018 highs a day after the Bank of Canada struck a more bullish economic outlook. America’s job market will be in the spotlight today with weekly claims expected to remain elevated around 900,000.


Canada’s dollar was camped at April 2018 highs a day after the Bank of Canada sounded more confident in the economic outlook. While significant downside risks to growth remain over the near-term, the medium term picture is looking brighter thanks to vaccine rollouts, the BOC acknowledged this week. Not only did the BOC decide against a small, micro cut to its 0.25% base rate, as a minority of market players had expected, its more bullish longer run outlook offered few hints of lower rate policy this year.


The U.S. dollar dipped to one-week lows but had its fall cushioned by forecast-beating American data. Jobless claims edged down to a still-high 900,000 from a downwardly revised 926,000 the prior period. Numbers on housing starts and the Philly Fed index also proved stronger than expected. Optimism over stimulus remains a leading drag on the dollar. Any bounce higher in Treasury yields from the better than expected data could support the greenback.


The euro rose to the upper end of a tight range after the ECB held fire on fresh stimulus to boost the decidedly vulnerable 19-country economy. The euro could struggle to revisit recent peaks anytime soon after the ECB president, Christine Lagarde, acknowledged “pronounced” risks to the downside for the bloc’s economy, a worrisome tone that left the door open to stronger stimulus. A dimmer economic outlook across the continent has pumped the brakes on the euro’s surge to 2018 highs.


Another day, another high for the U.K. pound which touched its strongest since May 2018 against the greenback. Sterling is shining amid fading prospects for Britain to resort to negative interest rates. British inflation appears to be heating up and could trend higher in the months ahead. The pound, meanwhile, is also being rewarded for Britain’s relatively smooth rollout of Covid-19 vaccines which bodes better for the economic recovery from the pandemic.

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