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Currency Market Analysis

Mar 31, 2021 | Currency Market Analysis

Global Themes

The U.S. dollar’s rally to multimonth highs cooled ahead of key data and an expected proposal by the Biden administration for trillions more in fiscal spending. The buck charged to fresh one-year highs against the yen but lost ground to the euro, sterling and Canadian dollar. Growing optimism in the outlook for U.S. growth and rising Treasury yields have the trade-weighted dollar on track for a gain of around 2.5% this month, its best performance in five years. The dollar’s strength stems in part from rising vaccination rates that have contributed to the brightest consumer confidence in a year. Meanwhile, data this week are forecast to show the strongest job market in months with ADP private sector hiring today followed by nonfarm payrolls on Friday. President Biden today is expected to unveil a new fiscal stimulus proposal that’s expected to be partially paid for by higher taxes.


A modest quarter-end lift allowed sterling to pare monthly declines of more than 1% against the greenback. Revised data showed the British economy grew at a quarterly rate of 1.3% during the last three months of 2020, above forecasts of 1%. The Q4 upgrade shaved a tick off its 2020 performance when it contracted by a record 9.8%, still its worst showing in more than 300 years. Recent pressure on the pound could abate as attention turns to the expected loosening of lockdowns starting in mid-April.


The euro edged off November lows but maintained a bearish bias. A darkened near-term outlook for the 19-country economy had EURUSD on pace to depreciate by about 2.8% in March. While euro sentiment could get worse before it gets better, the second quarter could herald reason for optimism if Europe picks up the pace of vaccinations and the economy stabilizes. Data today showed that euro zone inflation improved to a 1.3% annual rate in March from below 1% in February.


Canada’s dollar bounced above three-week lows thanks to faster domestic growth and firmer oil prices. Canadian growth accelerated by 0.7% in January, which topped forecasts of 0.5%, and followed December’s lackluster increase of 0.1%. Canada forecast the economy would remain in an upper gear as it sees February growth of around 0.5%. The loonie strengthened in the wake of the bullish data as it bolstered the case for the Bank of Canada to decrease its bond buying program as soon as next month. Slightly firmer oil kept above $60, though prices could see some volatility ahead of an OPEC meeting this week.  


The dollar steadied around highs for the year after data pointed to a strengthening U.S. labor market. ADP reported the strongest hiring in six months in March, when private employers added 517,000 jobs. While a bit below forecasts of 550,000, hiring in February got upgraded to 176,000, an increase of nearly 60,000 jobs. While ADP isn’t a reliable gauge of how nonfarm payrolls might fare, it paints an improving picture of the labor market. Given markets’ lofty expectations for March hiring, seen up by 650,000, the dollar could fall prey to the buy the rumor of good news and sell on the fact.

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