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Currency Market Analysis

Feb 05, 2021 | Currency Market Analysis

Global Themes

The U.S. dollar’s rally to multimonth highs downshifted on caution ahead of today’s important snapshot of America’s labor market. Before taking a breather, the buck had motored to new two-month peaks against the euro. Sterling strengthened, boosted by dashed expectations of Britain adopting negative interest rates. The oil-buoyed Canadian dollar held firm ahead of local jobs data. The greenback has pieced together an impressive run of late as U.S. economic prospects show signs of a material brightening. Today’s U.S. January jobs report could validate some of that optimism and potentially help sustain the dollar’s run. Forecasts call for hiring to bounce back with a gain of 50,000 jobs last month after shedding 140,000 workers in December. North of the border, Canada’s job market is forecast to spend a second straight month in reverse with higher unemployment in the cards.

GBP

Sterling jumped toward recent 32-month highs as recent sources of negativity faded. The pound received a boost this week after the Bank of England left interest rates in positive territory, albeit at an all-time low of 0.1%. Sterling bulls cheered the perception of a high and rising bar to negative interest rates. Britain’s central bank played up elevated near-term economic uncertainty, but also sketched a brighter outlook for growth from the second quarter which if realized would suggest that negative rates are buried deep in the toolbox.

USD

The U.S. dollar lost altitude after America’s jobs report served as an excuse to book some profit after one of its best weeks in months. America added 49,000 jobs in January, a whisker below forecast, and came with downward revisions to hiring in November and December. Unemployment improved to a still-elevated 6.3% from 6.7% where it was expected to remain. On balance, the jobs data is consistent with a weak but improving labor market, particularly with jobless claims trending in the right direction. Any setback to the dollar from the data may prove short-lived as it left intact conviction of the U.S. serving as a leading locomotive of global growth.

CAD

The loonie firmed in the wake of mixed domestic data. Canada’s labor market surprised to the downside in January when it shed an outsized 212,800 jobs versus forecasts of a loss of around 50K. The hiring contraction catapulted unemployment to 9.4% from 8.6%. It helped at the margin that all of the January job losses came from part-time positions. Another survey showed that Canada’s trade deficit narrowed more than expected to C$1.7 billion in December. The weakening state of Canada’s job market validated expectations that the economy likely contracted in Q1.

EUR

The euro steadied on caution ahead of America’s monthly jobs report but not before descending to two-month lows. Underlying euro sentiment darkened anew in Friday data showing a bigger than expected decline in German factory orders in December whose nearly 2% tumble was almost double expectations of a 1% drop. Elevated euro long positions, or bets on EURUSD extending last year’s 9% rally, suggest that its downturn may only be in the early innings.


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