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Currency Market Analysis

Oct 26, 2021 | Currency Market Analysis

Global Themes

The greenback alternated between modest gains and losses as central banks commanded the spotlight. The buck slipped against rivals from Europe and Canada, but strengthened versus the yen. Canada kicks off a busy week for global markets when the country’s central bank on Wednesday issues a policy update and new economic projections. A day after the Bank of Canada, the Bank of Japan and European Central Bank will release policy statements. The U.S. dollar has broadly outperformed this year as the rebounding American economy has the Fed on the cusp of dialing back on stimulus. But the dollar’s strength has shown signs of dissipating, particularly against counterparts like the loonie and sterling whose central banks appear poised to raise lending rates before the Fed. The latter half of the week, meanwhile, is stacked with third quarter GDP reports from the U.S. and Europe. 

CAD

The Canadian dollar held firm and less than a cent away from four-month peaks against its U.S. counterpart. Stronger oil above $84 supported the loonie. A looming Bank of Canada policy meeting and fresh economic forecasts also underpinned the C$. The BOC is expected to take a big step closer Wednesday to retiring its weekly asset purchases. Should Ottawa upgrade its inflation forecast it could set the stage for interest rate liftoff earlier than the second half of 2022. A more hawkish outlook for monetary policy could add fuel to the loonie’s rebound.

EUR

The euro was little changed with upside capped by expectations for the ECB Thursday to reiterate a dovish outlook for monetary policy. The health of the German economy, Europe’s biggest, remains a concern after a gauge of business confidence deteriorated for a fourth straight month in October and fell to six-month lows. Still, the ECB may not sound overly dovish with inflation forecast to accelerate from 3.4%, the highest since 2008, which is already well above the central bank’s 2% goal.

GBP

Sterling rose towards mid-September highs as bullish data kept the door open for Britain’s central bank to raise interest rates as soon as next week. A gauge of retail sales topped forecasts in October, a sign that households are holding up reasonably well in the face of high inflation. Market pricing suggests a near certainty of the Bank of England raising rates to at least 0.25% from 0.10% on Nov. 4, the central bank’s next announcement.


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