Global Themes

The U.S. dollar was broadly flat Wednesday after scoring fresh 2018 highs overnight. The buck gave back some ground to the euro, sterling and Canadian dollar, but enjoyed a solid 0.5% gain against the yen. The dollar’s rally paused ahead of U.S. inflation data that could potentially add fuel to an upturn that’s shown few signs of abating. Expectations of faster U.S. growth have the Federal Reserve on track to raise interest rates further, a bullish outlook that’s proven a compelling cocktail of dollar outperformance. So far, America’s decision to exit the Iran nuclear deal has elicited little reaction in the foreign exchange market. While oil prices have climbed to new 3-year highs above $70, it hasn’t translated into meaningful support to the Canadian dollar which hit seven-week lows this week while the Aussie dollar has fallen to 11-month lows. America reports on wholesale inflation today and consumer prices tomorrow.

YEN

The yen slumped to one-week lows, putting the Japanese unit in close range of a recent three-month trough. A rise in the yield on America’s 10-year Treasury was the catalyst that guided the lower-yielding yen downward. USDJPY has a heightened sensitivity to yields, particularly with Tokyo pursuing negative interest rate policy to help lift chronically low inflation.

USD

The dollar continued to tread water after a gauge of wholesale inflation cooled more than expected. The producer price index rose by 2.6% annually in April, undershooting forecasts of 2.8%. The data, while on the elevated side above 2%, is consistent with the prevailing view of the Fed sticking to a gradual pace of rate increases. Tomorrow’s report on consumer prices is forecast to show slightly quicker inflation. The 10-year Treasury holding around 3% should help limit falls in the U.S. currency.

AUD

The Aussie dollar carved out a new 11-month low as the U.S. dollar rally rolled on. The Aussie was already on a shaky footing after data this week showed that consumer spending Down Under unexpectedly stalled during the first quarter. Evidence of weaker growth keeps prospects of a local rate hike from 1.50% on a distant horizon which is damaging to the Aussie’s allure, particularly against the greenback whose central bank is poised to push American lending rates higher this year.

EUR

The euro stabilized after sinking overnight to fresh 2018 lows against the dollar. The euro continues to be plunged by slower European growth and stubbornly low inflation that suggests a longer wait for the ECB to boost interest rates from record lows. Meanwhile, adding insult to injury, euro-negative political uncertainty has heated up in Italy, the euro zone’s third biggest economy. Italy appears headed for early elections, possibly as soon as July, after squabbling parties dismissed calls by the country’s president, Sergio Mattarella, to form a neutral government.

CAD

A nearly 3% jump in oil markets to above $70, a new 3-year high, help the commodity-backed Canadian currency bounce above seven-week lows. The loonie also found support from reports of constructive NAFTA negotiations this week in Washington. Officials from the U.S., Canada and Mexico are hoping to make meaningful progress on updating the North American trade pact ahead of national elections in Mexico in July and U.S. midterm elections in November. Looming ahead for USDCAD is Canada’s monthly jobs report Friday that’s forecast to show unemployment held below 6% in April, the lowest level in decades.

GBP

Sterling steadied after slumping to new four-month lows against the reenergized U.S. dollar. The pound caught a breather on caution ahead of tomorrow when the Bank of England is expected to leave borrowing rates unchanged at 0.50% to help buoy an economy that grew at the weakest rate in 5 years last quarter. Key for the pound will be how the nine (9) BOE members vote on rates and whether the bank signals a willingness to raise them this year. Should the BOE narrowly vote against a rate increase tomorrow, it could set the stage for a rate hike over the second half of 2018 and potentially allow the pound some room to run after shedding the better part of 10 cents since mid-April.

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