Currency Market Analysis

Oct 27, 2021 | Currency Market Analysis

Global Themes

The U.S. dollar was little changed as currencies looked to data and central banks for direction. The buck fared mixed with declines against the euro and yen and gains versus sterling and the Canadian dollar. The hottest core inflation Down Under in 6 years boosted the Aussie dollar. Market caution reigned ahead of data and central bank announcements that could shape currency sentiment into year-end. Having seemingly formed both a near-term top and bottom, the greenback will look to data and next week’s Fed decision for a steer. The loonie neared a two-week low ahead of today’s policy announcement from the Bank of Canada. Ottawa is expected to reduce its bond buying stimulus with markets on tenterhooks to see if central bankers share their more hawkish expectations for eventual interest-rate hikes. Any divergence could agitate market volatility.

CAD

Canada’s dollar flirted with two-week lows against the greenback ahead of today’s policy update and new economic forecasts from the Bank of Canada. The BOC is expected to keep its benchmark interest rate steady at a record low of 0.25% and halve its C$2 billion weekly bond purchase program as the economy shows renewed vigor after it stumbled in the spring. A key for the loonie will be whether the BOC shares market views of faster and more frequent rate hikes next year than Ottawa projected in July. Any pushback by the BOC on more aggressive policy tightening could weigh on the loonie.

EUR

Having already fallen ahead of Thursday’s ECB decision, the euro steadied as the event drew closer. The 19-country central bank is seen pitted between a rock and a hard place with inflation on the rise and recovery momentum on the decline. No policy changes are expected this week but the ECB’s view on rising inflation will be important. A less dovish tone that voices concern over inflation could prove euro-positive.

GBP

Sterling backpedaled from one-month highs against the dollar and its strongest in 20 months versus the euro. Focus today is on British government’s semi-annual economic update. The pound has been on a tear as rising UK inflation dials up pressure on central bankers to lift interest rates. But the rate debate is a fluid one given lingering downside risks to the British economy from worker shortages and clogged supply chains.

USD

The U.S. dollar was choppy in data- and central bank-driven trade. Lower Treasury yields, with the 10-year below 1.60%, caused the dollar to pare some of its weekly gains. Data was mixed as durable goods fell by a smaller than expected 0.4% in September while the component of business spending beat forecasts with a 0.8% rise. Having formed a near-term top and bottom, the dollar is in a bit of a holding pattern ahead of more data and central bank decisions over the coming week.


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