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Currency Market Analysis

Feb 16, 2021 | Currency Market Analysis

Global Themes

Optimism about a synchronized global recovery pushed the U.S. dollar on its back foot. The greenback fell to three-week lows against the euro and the Canadian dollar and hit a new 34-month bottom against the high-flying U.K. pound. The dollar is in the doldrums as growth differentials show signs of brightening abroad while recent U.S. numbers depict moderating momentum. Japan’s economy enjoyed stronger than expected growth during the fourth quarter when it grew at an annual rate of 12.7%. Data today showed that the euro zone’s 0.6% contraction last quarter was slightly shallower than expected. Meanwhile, U.S. surveys last week dealt a setback to recovery expectations as inflation remained stubbornly low, weekly jobless claims stayed high and consumer optimism unexpectedly receded. In a worrisome sign for dollar sentiment, it’s decline came against a backdrop of higher Treasury yields with the 10-year around 1.24%.


The loonie flirted with 4-week highs as brighter risk sentiment weighed on the greenback which tends to sputter when global optimism rises. The commodity-correlated Canadian dollar is also finding support from oil holding near recent 13-month peaks around $60. Key event risk looms with Canada due to publish inflation Wednesday and retail sales on Friday. Consumer prices are forecast to edge up to a still-low 0.8% in January, while consumer spending is seen at risk of contracting in December. Tepid prints would leave intact expectations for the Bank of Canada to hold off on interest rate hikes this year.


Global optimism and higher stocks helped sterling extend its winning streak as it notched fresh 34-month peaks. The pound’s latest bounce had it half a cent away from a key psychological threshold against the greenback. Sterling’s coming direction could see some swaying from important British numbers Wednesday on inflation and consumer spending on Friday. Weakness is in the cards for both surveys with inflation forecast to tick down from 0.6%, while retail sales are seen contracting by 2.5%.


The U.S. dollar erased the bulk of its losses following bullish remarks from a Fed official that dovetailed with surprisingly solid data. The Empire State index of New York area factory growth proved two times stronger than expected, printing at 12.1 in February versus forecasts of 6.0 which compared to a reading of 3.5 in January. Meanwhile, James Bullard, the president of the St. Louis Fed, saw scope for higher inflation this year and the potential for the economy to come ‘roaring’ back after the pandemic. Meaningfully higher inflation and growth could pull forward expectations for the Fed to unwind some of its low rate policies that have weighed on the greenback.


The euro strengthened to 3-week highs as area data bolstered confidence about an eventual synchronized global recovery. Germany’s influential ZEW index of investor confidence unexpectedly brightened this month, rising to 71.2 compared to forecasts of a below 60 print, following January’s 61.8. And while the euro zone contracted 0.6% during the fourth quarter, it wasn’t as bad as expectations of a deeper decline. The data on balance is consistent with better times ahead, though maybe not until around the middle of the year at the earliest.

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