Good Evening All;
the U.S. dollar returned from the holiday weekend in decidedly weaker shape, having hit its weakest in more than a month against the euro and yen, and its lowest in more than three against the Canadian dollar. The dollar took a one-percent plunge on a trade-weighted basis, falling to its lowest in nearly six weeks, after America’s president-elect was quoted in a media interview as saying U.S. ‘companies can’t compete’ with China ‘because our currency is strong and it’s killing us.’ Meanwhile, the dollar took its biggest hit against the U.K. pound which rebounded 2.5 percent from its lowest level in virtually 31 years in the wake of a big speech today from Britain’s prime minister on the country’s impending exit from the European Union. Currency market volatility is likely to remain high with more risk events looming over the balance of the week, including central bank decisions in Canada and the euro zone on Wednesday and Thursday, respectively, and Friday’s inauguration of America’s next president.
A dollar swoon and a pound rally was broadly supportive of the euro which soared by nearly a percent against the dollar to its strongest in six weeks. Euro sentiment also got a fillip from data showing a brightening in German investor optimism in January, which added to a string of data indicating growth on the rebound in the 19-nation bloc. The data helped cement expectations for the ECB to hold monetary policy steady on Thursday when officials meet for the first time this year. The euro could test more room to the upside should ECB chief Mario Draghi acknowledge the economy’s sturdier footing.
Sterling rebounded in style from its weakest level in virtually 31 years a day earlier with a more than 2 percent rally on Tuesday. British Prime Minister Theresa May said in a speech today that the country would make a clean break from the European Union. But the U.K. leader sounded a hopeful note that Britain would secure the ‘freest possible trade in goods and services between Britain and the EU’s member states,’ a scenario perceived as less economically damaging to Britain. Adding fuel to sterling’s recovery was news that U.K. inflation rose by 1.6 percent annually in December, the strongest in 2 ½ years. With inflation seemingly on a faster track to meeting the Bank of England’s 2 percent target, it suggested policymakers would be less likely to lower lending rates in the months ahead which bolsters the pound’s yield appeal. Brexit uncertainty lingers and risks undercutting moves to the upside in the pound.
Canada’s dollar reclaimed three-month highs as a plunge in the greenback boosted its prospects and put upward pressure on the price of oil which rallied more than 1.5 percent to above $53. A big risk event looms Wednesday for the loonie when Canada’s central bank issues its first interest rate decision of the year, with expectations for bankers to keep rates parked at 0.50 percent. Key for the loonie’s reaction to the BOC will be how bankers characterize the economy’s health and its coming prospects. Any acknowledging of stronger data would sound a hawkish note, a scenario that would tend to be loonie-positive.
The dollar was blindsided Tuesday by remarks from both sides of the Atlantic, falling one percent on a trade-weighted basis, and sinking more than twice that versus a resurgent U.K. pound. A risk for the dollar is if America’s next president should favor a weaker dollar policy to help U.S. companies better compete on the global stage, a move that would make the cost of U.S.-made goods less expensive. America’s president-elect in remarks to The Wall Street Journal signaled the buck was too strong and a headwind on companies. The dollar also lost some buoyancy after the Empire State index of New York area manufacturing showed a moderation in factory growth. Next to drive the dollar will be U.S. inflation data on Wednesday that’s forecast to top 2 percent, and Friday’s inaugural speech by the new president.