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Currency Market Analysis

Feb 26, 2021 | Currency Market Analysis

Global Themes

When market volatility reawakens, investors tend to duck for cover in the greenback, the world’s most liquid currency. The dollar rallied above seven-week lows against the euro and its weakest in years against peers from the U.K., Canada and Australia in bond market-driven volatility. Investors are gaining confidence in the broader economic outlook, a driver that’s pushed Treasury yields sharply higher. Still, many of them fear that yields also may be rising for a worrisome reason: Inflation may be poised for an undesirable rise that pulls forward the time frame for the Fed to lift interest rates off crisis lows. The heightened focus on inflation has raised the stakes for key U.S. data. On tap today are numbers on consumer spending and the Fed’s preferred gauge of inflation. Forecasts calls for the core PCE index to moderate by a tick to a 1.4% annual rate.


Bond market-induced volatility spurred a flight to safety in the greenback, knocking the euro from seven-week peaks to one-week lows. The latest levels had EURUSD on track to end a third straight week little changed. The pair may be poised break the range next week when the euro zone issues influential inflation and unemployment data on Tuesday and Wednesday, respectively, followed by U.S. nonfarm payrolls on Friday.


A spike in market volatility put a halt to the U.K. pound’s upswing, leaving it at risk of its first down week in seven. The pound tends to ebb and flow along with underlying risk sentiment. When Wall Street notched new record highs this week, sterling was at its highest in roughly three years. Sterling may have set a near-term top if markets continue to fret that rising yields are a potential harbinger of higher inflation ahead that could prompt central banks to pull forward rate hike expectations.


The loonie dove from three-year highs as rollercoaster markets spurred a flight to safety in the greenback. In short order, USDCAD has rebounded from February 2018 lows to its highest in a week as skittish investors duck for cover. Still, oil markets remained resilient in the face of the bond market gyrations which helped cushion the loonie’s fall. While 2% lower early Friday, oil kept its chin above $62. Next week looms large for Canada’s economy when it issues Q4 growth on Tuesday that’s forecast to slow to a 4.8% increase from Q3’s record rise of 40.5%.


The U.S. dollar’s revival may have legs as warmer inflation is unlikely to put a lid on Treasury yields. Core inflation unexpectedly rose by a tick to 1.5% in January. That’s still comfortably below the Fed’s 2% goal. The news on the consumer was resoundingly positive as spending jumped a brisk 2.4% in January, a bullish sign for Q1 growth, while incomes soared by 10%, which bodes well for future spending. Today’s stronger set of numbers are likely to keep upward pressure on yields, the fuel behind the dollar’s revival.

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