The dollar faced a slowdown last Friday after comments from Federal Reserve Vice Chairman Richard Clarida. During an interview with CNBC, he suggested we faced a haltering global economy, vindicating the Fed’s dovish monetary policy. President Trump reiterated his wish for lower interest rates from the Federal Reserve, but to date there is no indication that the Fed is looking to adjust its course to accommodate these wishes.Investors have been moving towards safe haven currencies including the dollar after equities and key commodities including oil showed a decline. US technology stocks are becoming a concern, causing anxiety about burgeoning US corporate debt. The dollar continues to benefit from the windfall of the significant tax cuts implemented by the Trump administration and high employment, but there is a sense that in the long term, there may be a slowing of growth across the globe and the dollar will not be immune. A report from Bloomberg suggests that in the long term, the greenback may suffer as a result of the slump in oil prices. It may add to other factors, such as a challenging economic outlook and ongoing political turbulence, and accelerate the trend of investors reallocating investments into money-market instruments, which has proven in the past to be a sign of dollar weakness.
The key issue for the euro this week has been the ongoing saga of the Italian budget. The European Commission is giving a robust response but Italy is standing firm with regards increasing public spending and reducing the pension age in open defiance of EU rules. The central currency is also under pressure due to the slowing of growth across the Eurozone. Reports that the Italian Deputy Prime Minister Matteo Salvini may be open to reviewing the government’s 2019 budget gave the euro a boost. However, it’s clear that the tension between Rome and Brussels is having an impact on the euro and until the matter is resolved, there may still be a measure of volatility ahead. With Italy staring down the barrel of £2tn in public debt, but looking unlikely to blink first, and the EU keen to assert their authority and maintain union within the bloc, expect this story to be ongoing and meanwhile the euro may be paying the price for a lack of closure on the matter.
The Canadian dollar has been fairly weak against USD of late, as the depressed oil market weighs heavily on a currency that is inextricably linked to the commodity. This week saw the US dollar make the biggest gains overnight since 28 June on its Canadian counterpart; the move is attributed to the drop in oil prices. There is bearish pressure on the Loonie and it is struggling to respond to the current market conditions. There are concerns that the revised NAFTA deal, the USMCA, may struggle to pass through the Democrat-led Congress. A brief bounce late in the week suggested better times are ahead, but there are other issues weighing on the Loonie. The Bank of Canada (BoC) unveiled the 2021 review of the monetary policy framework, with a focus on unconventional policy and heightened concerns about the zero lower bound. Canada’s Consumer Price Index (YoY) data, due out today, is currently forecast at 2.2%, well within the bank’s target of 1-3%. Should we see this rise significantly beyond the forecast, we can expect the central bank to up interest rates to cool the economy and manage inflation. These higher rates may tempt foreign investors, and we could expect to see the Canadian Dollar to rise accordingly.
The pound remained stable at the start of the week despite the continuous rumours of instability in the UK government over its draft Brexit deal over the weekend, but the pound was inextricably tied to the matter of Brexit in a dramatic week. PM Theresa May visited Brussels to meet with the EU team, and the pound shot up dramatically after news that the draft agreement had been finalised – it is now a long wait to Sunday to see if the other European leaders will sign. German Chancellor Angela Merkel’s demand for a deal within 24 hours as a condition of her signing added to the mounting pressure and dissatisfaction from elsewhere, including the dispute over Gibraltar with Spain. On the domestic front, the borrowing figures showed that the deficit rose to £8.8bn from £7.2bn last year, the biggest October figure for three years, and significantly higher than the £6.1bn that was forecast. There is a caveat however, with a Treasury spokesperson declaring it the government's best year-to-date performance since 2005. The markets weren’t convinced, and the pound has been trending lower since the release of the data.
Bank of Japan Governor Haruhiko Kuroda warned in a speech this morning that declining profits at regional banks could destabilise financial systems and therefore harm the economy. He reiterated that the BOJ will continue with its current policy as inflation remains off its 2% target, but said the country’s economy is performing well nevertheless, with full employment and near-historic profitable businesses. The Japanese yen has been making gains as a safe haven currency while the euro struggles to keep up and the US dollar faces mounting pressure. The biggest challenge comes from USD, which continues to be weighed down by the latest disappointment from the US durable goods orders data and speculations that the Fed might pause the rate hike cycle as early as spring 2019. While the US is on a thanksgiving break, the yen may be the beneficiary.