The Canadian dollar continued to retrace the decline from back in May, and the appreciation in the loonie may accelerate in the following week should the Bank of Canada show an increased willingness to raise the benchmark interest rate off of 1.00%. According to Credit Suisse overnight index swaps, market participants widely expect the central bank to retain its current policy next week, but see borrowing costs increasing by nearly 50bp over the next 12-months as growth and inflation gather pace.
The yen advanced more than 2% against the greenback this week as the dollar came under pressure on concerns over the looming debt limit deadline. The gains come on the back of haven flows accelerated by concerns over sovereign debt downgrades and the threat of defaults in Europe. Economic data out of Japan also supported the yen’s rally with May Tertiary industry index and the June domestic GDP figures topping estimates. Industrial production and capacity utilization followed suit, besting expectations as the economy continues to gather pace in the wake of the March disasters.
The British Pound found strong support in the latter half of the week, after declining immensely on Monday, and nearly dropping another 200-pips on Tuesday, on a worse-than-expected price data print which indicated that inflationary pressures were easing. Similarly, in line with the Bank of England’s consensus that it would leave rates on hold for an extended period in order to boost economic growth, rate hike expectations fell sharply, suggesting that, on pure interest rate differentials, the Sterling could come under heavy pressure in the coming weeks.
European policy officials, over the past year, have taken the approach to impending financial disaster by putting out small fires only when conditions seem to be borderline crisis. This method was working for the euro initially as interest rate speculation kept translated into higher rates and a definable period of expected stability. However, market participants are clearly growing weary of this ‘kick the can down the road’ approach – especially as the rate forecast has eased back and exposed the threatening balance between risk and reward. Heading into the new trading week, we will have to monitor the same themes that have dominated for the past few months; because should global financial conditions flag, it will expose the crumbling situation in the Euro Zone.
It was a tough week for the world’s foremost currency (Ticker: USDOLLAR) as it finished sharply lower against key counterparts on sovereign credit rating fears and lackluster interest rate prospects. Traders began pricing in the previously unthinkable—a US Treasury default—on risks that US legislators may not agree to a budget deal as the government will soon run short of cash. Fed Chairman Ben Bernanke likewise sounded sunk the Greenback as he struck a dovish note on the future of monetary policy, and indeed risks remain weighed to the downside in the week ahead.