USD: Dollar rally stalls for now

The dollar rally failed to secure more ground against the major currencies last week.  The dollar’s impasse began after the release of January retail sales report on Thursday. The report showed that consumers who reduced their spending during the key holiday period in December also made additional cuts in their spending last month.  The December to January retail sales fell by -0.8 percent.  The previous monthly estimate (November to December) remained unchanged at -0.9 percent.

Analysts have been expecting consumer spending to pick up this year as low gas prices make more disposable income available to be spent on other items.  However, the December Commerce Department data showed that consumers are saving their additional income instead of spending.  The personal savings rate jumped to 4.9 percent in December from 4.3 percent prior month.

Consumer spending drives 70 percent of economic activities.  Therefore, if it fails to pick up in the coming months then the Fed may be swayed to abandon its plan to begin normalizing the interest rates this year.  This will further sap the dollar rally.

Looking ahead, the Fed’s January meeting minutes will be released on Wednesday.


EUR: All eyes on Greek debt negotiation

The euro surprised most analysts and gained a firm footing last week.  The 4th quarter Eurozone growth figures released on Friday showed that the Eurozone remained resilient and managed to beat the market expectation of 0.2 percent quarter-on-quarter growth by posting a 0.3 percent growth rate.  The annual rate also picked up to 0.9 percent from 0.8 percent in the previous quarter, supported by low gas prices and growing exports to non-EU economies.

Of the big four Eurozone economies,  Germany and Spain were the outperformers with quarterly growth rates of 0.7%, while France and Italy continue to underperform, highlighting the lack of structural reforms which are helping Spain to regain competitiveness.

That said, this week’s euro performance will be mostly determined by the outcome of Greek debt negotiation which is taking place in Brussels this week.  Without additional bail out loans, the Greek central bank runs the risk of running out of money to provide liquidity to their banks in the coming weeks.  If the newly elected anti-austerity Greek government, Syriza, dogmatically refuse to accept the EU bailout terms, then the euro could plummet amid the real prospect of a Greek exit from the Eurozone and ensuing financial turbulence.  Stay tuned.


GBP: The pound gains most among G-10

The pound took the mantel away from the US dollar last week and strengthened most among the G-10 currencies.  The pound rally began following the release of Bank of England’s Quarterly Inflation Report earlier in the week.  The report concluded that “the inflation will return to the 2% target within two years.”  Therefore, the central bank expects to stick with its plan to gradually raise its overnight interest rates.  Higher interest rates tend to strengthen the currency.

Bank of England Governor Michael Carney also shared his optimism during his Quarterly Inflation Report presentation that “the recent robust expansion in UK domestic demand” should continue to be supported by “the fall in energy prices and rising wage growth.”  Consequently, Governor Carney stated that the bank’s next monetary policy move would likely be an interest rate hike.

And further supporting the pound, the market is now speculating that the bank’s Monetary Policy Committee could move to raise the interest rate earlier than the first quarter of 2016 if upcoming economic data continues to impress the market.

This week, the January Consumer Price Index report will be released today. The Bank of England minutes and the December average earnings will become available on Wednesday.  Finally, the January Retail Sales data will close out the week on Friday. Do watch out for another potential pound rally later in the week.


CAD: Found a support for now

The Canadian dollar found some support last week as crude oil prices stabilized around $55 per barrel, and manufacturing activity unexpectedly picked up in the past month.  The December Manufacturing Shipments data rose 1.7 percent month-on-month after the 1.3 percent drop in November.  The December increase came despite a 9.3 percent drop in petroleum and coal related activities.

That said, Bank of Canada Deputy Governor Anathe Cote is scheduled to speak on inflation expectations and monetary policy on Thursday.  The market is anticipating that the central bank will remain troubled by low energy prices and their drag on the growth.   The central bank is projecting the growth rate to slow further this year to near 2.0 percent, and inflation to remain well below the 2.0 percent target rate.

Therefore, if Bank of Canada Deputy Governor Cote hints at another rate cut in March in her speech on Thursday, then the Canadian dollar will likely find no support and venture lower.


AUD: The Aussie dollar stumbles again

The Aussie dollar stumbled badly last week after the January employment report showed that the labor condition has worsened, and the Reserve Bank of Australia now has no choice but to lower the interest rate again during their next meeting in hopes of mitigating the negative effects of falling commodity prices and anemic export markets on the economy.

Full time employment fell by 28.1K in January, and the unemployment rate surged to the highest rate in 13 years to 6.4 percent from 6.1 percent in December.  Immediately following the report, the Aussie dollar plunged by a full percentage point against the major currencies and remained under pressure as there are no signs of quick turnaround in commodity prices and global recovery.

Australian futures market is pricing in about 70 percent probability of another rate cut by the Reserve Bank of Australia in March.  This move will further weaken the Aussie dollar since lower interest rates will make the currency less attractive for overseas investors to hold.

The January Reserve Bank meeting minute will be released overnight. There are no other major economic data or events scheduled for this week.