Currency Market Analysis

Sep 20, 2021 | Currency Market Analysis

Global Themes

Safer currencies from the U.S., Japan and Switzerland soared as stocks around the world plunged on worries about the solvency of one of China’s largest real estate developers. The dollar slipped against the yen and Swiss franc but jumped to four-week highs versus the euro, sterling and Canadian dollar. Risk aversion is reigning on worries about a potentially disorderly resolution to China property developer Evergrande’s massive cash crunch. It’s unclear whether Beijing would allow the real estate giant to default on its debts, a scenario that could ripple across global markets. Markets were already edgy heading into a week in which Canada chooses a prime minister and the Fed offers an update on its plans to reduce stimulus. The dollar could add to its gains if the Fed should signal strongly that policy tapering is likely in November.

GBP

Sterling fell to four-week lows against popular safe haven play the greenback. Sterling is facing twin headwinds today from the rush to safety in the greenback and sliding global stocks that weigh on risk appetite and squeeze the UK currency. The pound faces central bank event risk from Washington on Wednesday and London Thursday when the Bank of England offers a fresh update on policy. Downside for the pound could be stemmed if the BOE should emphasize upside risks to inflation that’s already running at 2012 highs above 3%, potentially hawkish guidance that would strengthen the case for a 2022 rate hike.

CAD

An Election Day slide knocked the Canadian dollar to one-month lows against its U.S. counterpart. Canada goes to the polls today to decide whether Justin Trudeau remains the country’s Liberal prime minister. Polls suggest a close contest between the Liberals and Conservatives. Consequently, a decisive outcome could prove loonie-positive. However, a deadlock conclusion could spell protected political uncertainty that could increase pressure on the loonie. Ahead of the election result, the loonie traded sharply lower as global markets, including oil, sold off sharply. Canadian retail sales Friday are forecast to fall for the third time in four months.

EUR

The euro tumbled to four-week lows against the dollar as investors sought safer ground on worries about China’s highly indebted property developer Evergrande. A gauge of European stocks tumbled more than 2% with Wall Street futures pointing to similar losses. The euro is also treading carefully ahead late week sentiment surveys from Europe on factory growth and German business confidence with moderation in the cards. Tepid data would reinforce the ECB’s dovish outlook for monetary policy.


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