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Currency Market Analysis

Oct 20, 2021 | Currency Market Analysis

Global Themes

A moderation in risk appetite and elevated Treasury yields helped the U.S. dollar steady above multiweek lows. Sterling led major currencies lower after UK inflation unexpectedly cooled. USD/JPY flirted with four-year peaks as the U.S. 10-year yield climbed as high as 1.67%, the highest in five months. Commodity currencies from Canada and Australia were steady to firmer. The loonie could test its range today with Canada’s consumer price index in focus. Forecasts call for the cost of living survey to accelerate from nearly two decade highs, a scenario that would tend to green light a further reduction in central bank stimulus next week. The greenback continues to meander as it seeks a catalyst, a sign that a hawkish outlook for Fed policy is largely priced in.


Sterling weakened below one-month highs against the dollar, after UK inflation unexpectedly decelerated slightly. UK consumer prices slowed a tick to a 3.1% annual rate in September, below forecasts of a modest increase. Core inflation moderated more than expected to 2.9% from 3.1%. While the data wasn’t enough dampen expectations for the Bank of England to raise rates by December, the unexpected softening was enough to slow the pound’s resurgence.  


Canada’s dollar favored July highs as area inflation accelerated and oil, while lower, remained elevated. Headline inflation accelerated to a 4.4% annual rate in September, the highest since February 2003, from 4.1% in August. While that slightly eclipsed forecasts of 4.3%, the loonie didn’t rally much in the data’s wake as a gauge of less volatile core inflation steadied at 1.8%, below the Bank of Canada’s 2% goal. Hotter headline inflation will cement central bank policy tapering next week, but more tepid core prices suggest it will be a while yet before Ottawa raises interest rates.


The euro softened from three-week highs against the dollar as the looming departure of an outspoken ECB hawk galvanized the central bank’s dovish stance. Jens Weidmann said he would depart the central bank on Dec. 31, cutting short his term by more than five years. Mr. Weidmann worries more about inflation and therefore was at odds with many of his central-bank colleagues. The timing of the news coincided with data that confirmed euro area inflation rose at a fastest annual rate, 3.4% in September, since 2008.

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