October 2018

Oct. 11, 2018 (Western Union Business Solutions) – A subdued U.S. dollar slipped to one-week lows against the euro and to its weakest in three against the yen and sterling. However, the big selloff on Wall Street this week amid concerns that a sharp spike in U.S. bond yields could harm the world economy boosted the buck against commodity peers from Canada and Australia. The loonie slumped to two-week lows while the Aussie dollar kept near a 2 ½ year trough. The dollar tends to fare its best when markets slide and investors duck for cover in safer bets. But the buck has largely sat out the latest market meltdown as it’s helped coax Treasury yields down from multiyear peaks while signs of diminishing political headwinds in Europe buoyed the euro and sterling. While a tentative calm returned Thursday with U.S. bond yields down and riskier emerging market currencies higher, caution is likely to persist, particularly ahead of news today on U.S. inflation.

 

USD

 

Softer than expected U.S. data pushed the dollar to session lows. The rattled stock market may take comfort from the latest U.S. inflation data as consumer prices rose at an annual rate of 2.3% in September, below the last reading of 2.7%, and under forecasts of 2.4%. Less volatile core consumer inflation steadied at 2.2%. Weekly jobless claims rose more than expected to a still low 214,000. While inflation remains relatively take, its at risk of climbing given low unemployment and the strong economy. Still, until meaningfully higher inflation materializes dollar gains could be tougher to sustain beyond the near-term as benign price growth can reduce pressure on the Fed to raise rates.

 

JPY

 

The yen was among the winners of the global stock meltdown that started on Wall Street. The yen shines its brightest when the global outlook dims as risk-skittish investors seek traditional safe harbors such as the Japanese currency. The stampede to safety momentarily knocked USDJPY below a key floor that had held since mid-September. The longer volatility sticks around, the better the yen should fare over the near term.

 

GBP

 

Sterling rallied to three-week highs on signs that Britain and the EU might be on the brink of clinching a Brexit treaty over coming days. The pound continues to move in fits and starts in response to Brexit headlines. A securing of a Brexit agreement would represent a big step forward in Britain’s bid to leave the 28-country EU in March 2019. A trade deal would also help to instill some semblance of certainty for U.K. businesses, potentially easing a major headwind on Britain’s economy.

 

EUR

 

The euro scored one-week highs against the greenback, boosted by a reduction in political uncertainty in Italy and Britain. The euro managed a technical victory after it closed above a key support which offered scope for stabilization for a currency that’s fallen to seven-week lows. The euro got a lift from Italy’s economy minister who intends to win back market confidence in its handling of its budget battle with the EU. Italy’s budget crisis remains fluid, suggesting the euro isn’t out of the woods. The euro also rode the U.K. pound’s coattails higher as expectations grow for Britain and the EU to agree on a Brexit treaty.

 

CAD

 

Canada’s dollar tumbled to two-week lows as global growth fears flared and oil prices moderated. The price of crude was a percent lower to below $73 Thursday which depressed the value of commodity-oriented assets. Concerns about skyrocketing bond yields and no end in sight for the U.S.-China trade war have overshadowed Canada’s sturdy economic fundamentals and expectations for the Bank of Canada to raise borrowing rates for a third time this year on Oct. 24. Still, Canada’s bright fundamentals could help slow the loonie’s pace of decline.


USA 

Oct. 8, 2018 (Western Union Business Solutions) – The greenback extended a winning streak Monday in holiday-light trade while broader markets remained on a weaker footing. The euro and sterling slid 0.4% and 0.6%, respectively, with the former sinking below support to its lowest in seven weeks. The yen and other safe havens generally outperformed while the Canadian and Australian currencies lost ground. What’s been weighing on broader markets has been supporting the dollar: rising interest rates around the world for both fundamental and worrisome reasons. Italian borrowing rates have climbed, a sign of investor worry in the nation’s debt crisis. U.S. lending rates have risen but for fundamental reasons following bullish U.S. data. Numbers last week showed the lowest American unemployment (3.7%) in nearly 50 years. Moreover, global market weakness is spurring buying of the U.S. currency has a safe harbor. Focus of the week ahead will be U.S. consumer prices, a key gauge of inflation, on Thursday.

 

EUR

 

More weakness drove the euro to seven-week lows against the greenback. Markets are growing increasingly concerned about the shaky state of Italian finances which has led to rising borrowing rates for Rome. Even Europe’s fundamental narrative has shown mounting signs of weakness as data today from top economy Germany disappointed. A gauge of German factory growth unexpectedly fell in August and for the third month running. The euro fell through a key floor against the dollar which potentially sets the stage for further weakness over the coming days.

 

CAD

 

Canada’s dollar dipped to late September lows as oil markets moderated from multiyear peaks and the greenback remained in vogue after a week of mostly bullish U.S. data. Canadian markets have Monday off to celebrate the nation’s Thanksgiving holiday, so price action could prove limited. The odds of Canada raising borrowing rates in a little over two weeks, on Oct. 24, increased after local data last week showed faster than expected hiring of more than 60,000 jobs in September which lowered unemployment to 5.9%, one of the lowest levels in decades.

 

USD

 

The U.S. dollar started the week with broad gains as bullish fundamentals and skittish global markets offered twin pillars of support. The dollar is on a two-week winning streak, helped in part by solid jobs data last week that reinforced expectations for the Fed to lift U.S. borrowing rates. While September hiring underwhelmed with a gain of 134,000, the two prior months were upgraded by a robust 87,000 jobs, and unemployment fell more than expected to 3.7%, the lowest since the late 1960s. And while the lid remains fastened on inflation, prices could be poised to rise given the ultra-low level of joblessness. That puts the focus on consumer prices Thursday. Core inflation is forecast to accelerate to a 2.3% annual rate for September from 2.2%.

 

JPY

 

The yen strengthened above late 2017 lows as global stocks slumped which buoyed demand for a broad range of safer bets like the Japanese currency. But rising U.S. interest rates bode negatively for the yen given how USDJPY is highly sensitive to yield differentials. The yield on America’s 10-year Treasury remained above 3.20%, the highest since May 2011. That compares to the yield on Japan’s 10-year government bond of less than 0.2%. The yen’s rise in the face of yield disparities underscores how markets are more concerned about safety, with many global stocks in the red.

 

GBP

 

Sterling lost ground as caution returned and the greenback remained on a multiweek winning streak. Sterling has recently outperformed thanks to upbeat remarks from EU leaders who have noted scope for a potential Brexit deal by November. Yet until an elusive deal is signed and delivered it will leave sterling vulnerable. Once Brexit and the EU hammer out a trade agreement it would still need to be approved by the U.K. Parliament which remains divided over the type of Brexit to pursue.

Oct. 1, 2018 (Western Union Business Solutions) – A dip in USDCAD to 4-month lows below 1.28 has moved the Value Indicator which in turn could do the same for those USD or CAD buyers that have been sitting on the fence.

The so-called Value Indicator – which is based on moving averages and offers a rough estimate of currency strength – is flashing undervalued after the big move lower in USDCAD. This is good news for USD buyers who are less than a month removed from the market being above 1.32. CAD buyers, on the other hand, continue to benefit from USDCAD having started 2018 below 1.26, amounting to a YTD gain of nearly 2%.

The tentative trade agreement reached between the U.S. and Canada has allowed a big cloud of uncertainty over the latter to dissipate. The trade deal, dubbed the U.S.-Mexico-Canada Agreement, still needs to be ratified by lawmakers. The USMCA reduced trade uncertainty and put the focus on Canada’s sturdy economy and expectations for the Bank of Canada to raise interest rates as soon as its next decision on Oct. 24.

USDCAD could see more volatility later this week when the U.S. and Canada release influential data Friday on jobs and trade, numbers that could also impact the interest rate outlook on both sides of the border.

If indeed USDCAD is undervalued, it could be evident in how it responds to the U.S. and Canadian labor market reports on Friday. Oct. 5, at 8:30 am, EST. The U.S. economy is forecast to add 180k new jobs in September from 201k in August, while the unemployment rate is expected to decline from 3.9% to 3.8%.