The dollar is looking great
The dollar gained about 3 percent against most currencies last week as six central banks around the world took extra steps to combat falling prices and a stagnant economic growth. They are either cutting the short term interest rates or planning to buy more bonds, which would inject extra money into the financial system and encourage spending and investment.
Central banks in Turkey, Peru, Denmark and Canada cut their interest rates last week. The Bank of Japan and the European Central Bank doubled down and expanded their existing bond buying programs to further expand their money supply and lower long term interest rates.
As a consequence, the dollar rallied as overseas investors bought US assets in search of higher interest rates. Note that the Federal Reserve remains the only central bank who is ready to normalize its monetary policy and raise the short term interest this year as the economy managed to grow by 3 percent last year, and the unemployment rate to fell 5.6 percent in December from a 10 percent peak back in 2009.
The Federal Open Market Committee will release its policy statement this Wednesday. If the statement suggests that the Fed is determined to raise the short term interest rate in the coming months, then the dollar may continue its rally.
The euro will remain under pressure
The euro plunged last week after the European Central Bank (ECB) announced a plan to purchase €1.2 trillion in bonds within the next two years to inject more money into the financial system. The market was surprised by the scale of the ECB’s bond buying initiative considering a working figure of €500 billion was leaked only a week prior.
When the ECB buys bonds from banks, it literally prints money and thereby lowers interest rates and depreciates the currency. Lower interest rates and a weaker currency, in theory, will stimulate spending and investment and will also help raise prices.
It will take many months to learn if the ECB’s bond buying program will work or not. Meanwhile, the euro will remain under pressure because investors could earn much as 1 to 2 percent more on their savings or investment by holding US financial assets.
Moreover, the election of Syriza, an anti-austerity party in Greece, on Sunday could further undermine investors’ confidence in the euro in the coming days and weeks.
This week, the January German employment report will be released on Thursday, and the EU consumer price data for January will be released on Friday.
The pound gets no respect
The pound has failed to gain last week, particularly against the dollar, despite the release of better than expected retail sales and employment data. The December retail sales increased by 0.4 percent month-over-month in comparison to an expected drop of 0.4 percent. The unemployment fell to 5.8 percent, and the average household earnings also rose in December. Not bad at all.
So why did the pound fail to rally? It seems that the market was too focused on the European Central Bank. More notably, the pound failed to benefit as funds seeking higher interest rates bypassed UK assets because the Bank of England’s monetary policy committee members dropped their calls for higher interest rates last week as a response to falling prices at home and eroding demand for its exports, particularly in Europe.
This week, the 4th quarter Gross Domestic Product report will be released on Tuesday. If the growth number is much better than what the market is expecting, then perhaps the pound could gain some recognition this week and firm up.
The loonie is under pressure
The Canadian dollar (or the loonie) has depreciated measurably after the Bank of Canada surprised the market last week. It cut its benchmark overnight rate from 1 percent to 0.75 percent – citing that falling oil prices are having materially negative effects on the economy.
The bank is projecting that the real GDP growth will slow to about 1 1/2 percent and that the output gap will widen in the first half of 2015. Therefore, the bank is prepared to cut the interest rate again in March if there are no signs of an improving growth. And the prospect of another potential rate cut will continue to pressure the loonie lower in the coming weeks.
There is no major report or event scheduled for this week.
The Reserve Bank may cut rates next month
The Australian dollar is expected to continue its decline, which began three years ago. It is forecast to erode further this week amid expectations that the Reserve Bank of Australia will follow other central banks and weaken its currency when the bank meets in February. They are expected to cut the overnight borrowing rate, which stands at 2.5 percent.
Many analysts are forecasting that China will continue to slow this year and a global demand for commodities will weaken more. Therefore, a strong headwind for the Australian economy and its currency is expected to remain in place for an extended period.
This week, the 4th quarter consumer price index data will be released on Wednesday. If the inflation rate begins to decelerate, then a call for the rate cut will only intensify, and this will further weaken the dollar.