FX Insights 1/22 – 1/26

Last week we saw the U.S. dollar fall to its lowest levels since 2014, in tandem, some of its peers respectively moved to multi-year and multi-month highs. The dollar had a volatile week spurred by contradictory comments coming from U.S. officials at the Davos Conference. On Wednesday, Treasury Secretary, Steven Mnuchin seemed to deviate from the U.S.’ long standing strong dollar policy, commenting that “a weaker dollar is good for trade” only to be rebutted the next day by President Trump who responded “…ultimately, I want to see a strong dollar”. The commotion in currency markets following both statements perhaps indicates how desperately markets are looking for a sense of direction on the dollar given its tumultuous drop this year. The next clues on the dollar may come from the Fed which holds its first Federal Open Market Committee of the year this Wednesday although there are unlikely to be any material changes in the Fed’s statement. Non-farm payrolls headline this week’s data docket and are expected to show improved hiring in January following a slowdown in Q4 growth last week.

The euro hit its highest levels since 2014 as it continues to benefit from renewed optimism in the region and expectations of monetary normalization. Investors have been moving into euro denominated assets as the eurozone continues showing encouraging signs of growth and combined with political concerns and worse-than expected data in the US, the result has been relentless upward pressure for the euro. So far, markets have had little reason to disrupt the trend as European Central Bank President, Mario Draghi, did little to jawbone the euro’s appreciation during last week’s ECB meeting press conference. Growth, inflation, and unemployment data due this week will help assess how far the euro can extend its current rally.

The pound reached a crucial milestone last week when it finally broke pre-Brexit levels before retreating from 18-month highs. Progress on Brexit has provided some much needed comfort to the UK economy and a meeting by the EU General Affairs Council this Monday to determine details on the transition period should further ease Brexit concerns. Economic signs out of the UK have depicted a resilient economy as well with last week’s Q4 GDP showing the economy growing at a better than expected 0.5% quarterly rate. The pound enjoys a relatively light calendar this week ahead of next Thursday’s Bank of England meeting.

The Canadian dollar, Japanese Yen, and Australian dollar each hit 4 month highs against the U.S. dollar in last week’s trading. Rallying oil prices have aided recent strength in both commodity currencies amid general dollar weakness while the latest NAFTA talks have resulted in some new, albeit cautious, optimism for the Canadian economy. Aside from risks related to the negotiations, monthly GDP released for November will be the main driver for the currency this week. Last week saw inflation in December slowing by -0.4%, but economists are still forecasting growth to show a 0.4% monthly increase.

Australian inflation data released this week will provide the Reserve Bank of Australia with its last major economic cue prior to its meeting on Monday. Strong consumption and employment data have had the central bank upbeat on the economy in recent meetings and markets will be especially interested if the bank receives good news on the inflation front as well. Meanwhile, the Bank of Japan reined in speculation of early tightening last week following its policy meeting. The bank is unlikely to consider policy normalization until the second half of the year and will likely continue downplaying any expectation of tightening until then.

Sources: Bloomberg, Wall Street Journal, Reuters, Barclays, Bank of America, Econoday, 4cast

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