The USD is poised for the biggest rally in 3 weeks as investors turn their attention from domestic risks to those abroad. China’s FX reserves fell below three trillion dollars to hit a 5-year low as commodity currencies fell with oil this morning. OPEC’s production cuts have supported oil prices, but their efforts are being undermined by US shale production which is driving weaker oil prices.
Resurgent hopes for a rate hike in the next Fed meeting are further fueling a stronger dollar. Philly Fed President Patrick Harker said in a speech yesterday that he considers the March meeting viable for another rate hike whilst maintaining his support of three rate hikes this year – welcome news when investors were paring their estimates back to just two hikes in 2017.
As the dollar rallies, the euro is set for the biggest daily fall this year. French politics continue to be a concern for investors, compounded by allegations against frontrunner Emmanuel Macron of an affair, allegations he vehemently denies. Nipping at his heels is far-right candidate Marie Le Pen who champions “freedom” for France which includes leaving the euro, but ECB President Mario Draghi says not so fast. In an address to the European Parliament yesterday, he defended the single currency, saying that “the euro is irrevocable”. Draghi has been a vocal proponent of keeping the Euro-area together, even as calls for splits across the member states are increasingly endemic.
The Reserve Bank of Australia held interest rates in their first meeting of the year, prompting some interesting moves for the Aussie dollar. Governor Philip Lowe delivered a far more positive economic outlook, dismissing concerns of a technical recession in 2016. AUD advanced immediately after the announcement, but Lowe’s optimism failed to incite a prolonged rally and the AUD strength gave way to the surging USD. Investors may need more than one rosy report to get positive on the Australian dollar.
EURUSD: Euro fell as political risk pivots away from a US-focus to center on France and the EU.
GBPUSD: Sterling continues to fall as broad Brexit fears combine with a stronger dollar to push the pair below 1.24.
AUDUSD: Despite a positive outlook from the RBA, the Australian dollar gave up overnight gains against broad USD strength.
USDCAD: CAD is weaker, dragged lower with oil prices as US shale producers fill the gap that OPEC left.