Currency Market Analysis
Jan 28, 2021 | Currency Market Analysis
The greenback held firm around its highest level in more than a week against the euro and its strongest in more than a month versus Canada. The dollar has caught a broad boost from dampened enthusiasm about stronger recovery this year. Risk markets have struggled, leading to safe haven gains for the U.S. currency. The relentless pandemic has undermined confidence as did sobering remarks this week from the Fed chairman. The Fed vowed anew Wednesday to maintain ultra-cheap borrowing conditions for a while yet to bolster a recovery whose pace has ‘moderated.’ The Fed’s cautious outlook carried more weight, coming on the eve of a report today on how the U.S. economy fared during the fourth quarter. Market sentiment has also been sullied by Germany’s downgrade of its economic outlook for the year ahead.
The dollar’s rally faded after better than expected U.S. data lowered the market’s temperature. Weekly jobless claims improved to a still-high 847,000 in the latest week from a revised increase of 914,000 the previous period. Validating the Fed’s view of a moderating economy, U.S. growth slowed to a 4% annual rise in the fourth quarter after a record surge of 33.4% in the third quarter. For 2020, the U.S. economy contracted by 3.5%, not as bad as feared, but still its weakest performance since the mid-1940s.
Canada’s dollar tumbled to 5-week lows as faltering global markets spurred a flight to the safer greenback. Over the past week, USDCAD has appreciated by nearly 3 cents from April 2018 lows. While the loonie is vulnerable to continued market volatility, downside has been slowed a bit by oil markets, currently around $52, keeping within reach of recent peaks. Canada issues its November growth report Friday with forecasts calling for a second straight increase of 0.4%.
The euro slumped toward early December lows against the greenback, pressured by Europe’s bleaker growth prospects and a resurgent U.S. currency. Europe’s troubles in rolling out vaccines suggest a longer road to recovery. Meanwhile, concerns about a weaker recovery were validated after Germany this week downgraded its 2021 outlook, forecasting the economy would grow by around 3%, down from earlier estimates of nearly 4.5%. Europe’s weakening fundamentals suggest greater downside risk for the euro as it could give the ECB increased latitude to lower interest rates.
The U.K. pound fell more than a cent below 32-month highs against its U.S. counterpart. Renewed risk aversion with global markets mostly lower is one of the leading sources of weakness for the pound. Still, bouts of weakness have been curtailed by the relative success Britain has enjoyed in distributing Covid-19 vaccines. Britain’s shaky economic fundamentals may hold increased sway in the runup to the Bank of England’s first policy decision of the year on Feb. 4. A central bank that should play up downside growth risks would threaten to fan sterling-negative risk aversion.
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