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Currency Market Analysis

Oct 14, 2021 | Currency Market Analysis

Global Themes

The dollar’s rally to fresh highs for the year abated for a second straight session, pushing the U.S. unit to 10-day lows. The buck’s loss of altitude lifted the euro to 10-day peaks, while sterling and the Canadian dollar ascended to three-week and three-month highs, respectively. The greenback’s climb has been built on expectations for the Fed to dial back on stimulus this year. The overall strength of the economy, coupled with the latest Fed minutes that came out this week, suggests a near certainty of the Fed tapering its bond buying program as soon as next month. Consequently, the dollar is likely to fall prey to the buy the rumor (of less Fed stimulus), sell the fact (if it soon materializes). Lower Treasury yields, meanwhile, are not helping the dollar. The yield on the 10-year Treasury note fell to 1.53% from four-month highs above 1.60%, a sign of the downside risks to growth down the road if the Fed should bring forward plans to raise interest rates.

GBP

A trio of pillars lifted sterling to its highest in three weeks against its U.S. counterpart. Risk appetite returned, a positive for the pound, while the greenback’s ascent to highs for the year gave way to profit-taking, tugging it lower. The pound also continues to draw support from growing expectations for the Bank of England to raise borrowing rates around the turn of the year to fight inflation which is expected to continue to trend higher.

USD

The U.S. dollar trimmed losses that pushed it to 10-day lows following reassuring news on America’s labor market. Weekly jobless claims cracked below 300,000 – falling to fresh pandemic lows of 293,000. That was far better than forecasts of 319K from a revised 329K the previous week. Weekly jobless claims improving for a second straight week are a hopeful sign of faster hiring in October after weak job growth in September. Jobless claims continue to improve toward pre-pandemic levels around 225K.

EUR

The euro climbed to its highest in 10 days against the suddenly vulnerable greenback. The euro jumped as the dollar’s rally to July 2020 highs against Europe’s single currency succumbed to profit-taking. The euro also found support from improved risk sentiment with Wall Street futures pointed higher. Stocks are taking comfort from lower Treasury yields. Lower yields may be tough to sustain amid a backdrop of surging global inflation. Euro rallies may not gain meaningful traction given the recent dimming in European economic fundamentals.

CAD

The Canadian dollar rose to its highest level more than three months against the softer greenback. Stronger oil above $81 provided the main tailwind for commodity-driven C$, as crude hovered at 7-year highs. The loonie also benefited from signs of a rebounding economy as Canadian manufacturing sales rose 0.5% in August which followed a 1.5% plunge in July.


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