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Currency Market Analysis

Feb 17, 2021 | Currency Market Analysis

Global Themes

The U.S. dollar jumped out of its biggest hole in weeks thanks to soaring Treasury yields. The dollar rallied above three-week lows against the euro and Canadian dollar, charged to five-month peaks against the yen, and rose above 34-month lows versus sterling. Hopes that vaccines and more fiscal aid from Washington would pave the way to an economic rebound pushed the yield on the U.S. Treasury bond above 1.30%, a big jump from Friday’s close of 1.20%. The dollar has wavered this year but tends to find an easier time competing against its rivals, particularly the lower-yielding ones, as higher yields make it a more enticing bet. Key for the dollar’s direction today will be yields and a reading on U.S. consumer spending. Forecasts call for retail sales to snap a three-month skid.


The loonie moved about a cent below three-week highs against the greenback after local inflation rose but kept to still-subdued terrain. Canada’s consumer price index increased to a 1% annual rate in January from 0.7% in December. However, a measure of core inflation steadied at 1.3% compared to expectations of an increase. Inflation continuing to undershoot the Bank of Canada’s 2% bullseye bolstered conviction in the Bank of Canada’s low rates for foreseeable future outlook.


Rising U.S. Treasury yields put a halt to the euro’s rally to 3-week highs against its transatlantic rival. The big pop in America’s benchmark 10-year yield above 1.3% from 1.2% Friday overshadowed welcome news this week of an uptick in German investor confidence. As a low-yielding currency, the euro can fall prey to the dollar when attention turns to interest rate differentials.


Sterling edged down from multiyear highs against the yield-boosted greenback. But downside for the pound was checked by hints of a U.K. economic recovery taking shape. U.K. inflation ticked up to 0.7% in January which was on the warm side of expectations. Sterling faces another data risk in retail sales on Friday that are forecast to plunge due to renewed restrictions on business to curb the rise in coronavirus infection rates.


The return of the American consumer after a three-month hiatus kept the U.S. dollar biased higher. U.S. retail sales soared by some 5.3% in January, which marked the first increase in three months and the strongest one since June. A fresh round of stimulus was credited with awakening the consumer, America’s main growth engine, after a long slumber during the fourth quarter. Another tranche of fiscal support could be imminent which bodes well for further spending in the months ahead. Meanwhile, inflation showed signs of revving as the producer price index surged at a monthly rate of 1.3% in January which was nearly a percentage point hotter than expected.

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