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Currency Market Analysis

Apr 30, 2021 | Currency Market Analysis

Global Themes

The U.S. dollar rose above two-month lows but was poised for its first monthly decline of the year and its biggest since last summer. Data confirming the euro zone tipped into a double dip recession in the first quarter weighed on the euro, with sterling following suit. Canada’s dollar steadied ahead of key growth data this morning but not before it clocked another three-year high. For the week, the dollar was little changed as it found a modicum of support from higher Treasury yields. Before key U.S. consumer spending and inflation data, America’s benchmark 10-year was around 1.64%, above last week’s close below 1.57%. Dollar sentiment unraveled this month after the Fed insisted on a preponderance of strong data before telegraphing it would taper its unprecedented support to the economy.


Profit-taking after the euro’s first winning month of the year knocked Europe’s single currency below two-month highs. It also didn’t help that the euro zone followed up its 0.7% contraction in the fourth quarter by shrinking 0.6% in the first quarter, signaling a double-dip downturn. But despite the downbeat backward facing data, the view ahead has brightened on expectations for Europe to pick up the pace of vaccinations.


Sterling was on track for its third gain in as many weeks against the dollar. The pound climbed to one-week highs this week after the Fed signaled no end in sight for its dollar-negative low rate policies, despite the world’s biggest economy showing impressive momentum. For sterling to keep its winning streak alive it would need to successfully navigate a Bank of England policy decision on May 6, when the UK central bank is expected to maintain record low interest rates of 0.1%.


The Canadian dollar edged off three-year highs after slightly slower than expected domestic growth spurred some month-end profit-taking. Canada’s economy grew for a tenth consecutive month in February when it expanded by 0.4%, a tick below forecasts of 0.5%, and January’s pace of 0.7%. Downside for the loonie appears limited as Canada forecast faster growth of 0.9% for March. The loonie rolled to successive 2018 highs this week, boosted by the divergent outlook for central bank policy that casts Canada in a more hawkish light than the U.S.


The U.S. dollar just may dodge a fourth decline in as many weeks after the U.S. economy showed fresh signs of strength. Consumer spending rose by 4.2% in March while incomes soared by 21.1% thanks to government relief checks. The Fed’s main gauge of inflation, the core PCE index, jumped to 1.8% from 1.4%. Ordinarily such bullish data would be the dollar’s ticket higher. But any support to the dollar from the data is likely to prove limited given that the Fed wants to see a preponderance of strong data before rolling back stimulus. The dollar index’s April decline of 2.6% was on pace for its largest since July 2020.

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