OVERNIGHT MARKET SUMMARY
The U.S. dollar firmed against its major rivals overnight and remained on track to put in its second-straight weekly gain. The dollar’s modest recovery this week was driven in large part by the spike in global market volatility that prompted investors to trim exposure to riskier assets and seek relative safety in traditional safe harbors. Massive swings recently in global equity bourses were a significant departure from nearly a year of extremely low market volatility that had encouraged many investors to seek returns in riskier bets. The recent resurgence of market volatility has undermined many trading strategies that had paid off so well over the past year.
Of the strategies that quickly lost favor this week was one where investors had bet on continued low volatility and higher stock prices- particularly, higher stock prices in the euro zone. Portfolio flows into the 19-member economy’s stocks to take advantage of strong growth had been a key driver of the euro’s strength last year. The sharp decline in global stock prices this week undermined one of the single currency’s key supports and led to its worst weekly showing against the dollar since October.
The British pound, which had rallied on a surprisingly hawkish message from the Bank of England the previous session, pared much of those gains after the EU’s head Brexit negotiator said that a post-Brexit transition period was “not a given”. The comments were a reminder to many investors that the road ahead for the EU-U.K. divorce negotiations remains long and fraught with potential potholes- perhaps much more so than markets had recently been pricing in.
The loonie fell to its lowest level since late 2017 overnight as the combination of lower oil prices, which have fallen for six-straight sessions and the biggest monthly loss of jobs since 2009 in January pushed the unit to lows across the board. The Canadian dollar managed to claw back much of its earlier losses ahead of the market open in still very choppy trade.
USD: The dollar index firmed modestly overnight and remained on track for it second weekly gain against a basket of its major rivals. The sharp rise in global market volatility over the past week has provided some nascent support for the dollar as investors unwound bets in riskier assets. And while the Fed is likely keeping a watchful eye on the recent bout of market turmoil, it is unlikely at this point to see much of a potential impact from the market swings on the economy or on the broader health off the financial system. As such, the outlook for at least three Fed rate hikes this year remains largely intact (for now). This morning, President Trump signed a budget bill that ended a short government shutdown overnight. The resolution to a key concern about the functioning of government as well as the clarity provided by the budget should be mildly positive for risk sentiment. However, the fact that this budget is widely expected to add a net $320 billion in to the deficit over the next decade on top of the $1.5 trillion the recent tax reform adds to the debt is unlikely to alleviate worries about the economy overheating and inflation running too hot.
GBP: The British pound had rallied in the wake of the Bank of England’s message the previous session that lending rates could rise sooner and go higher than previously expected- a message that also highlighted the support for U.K. growth coming from an expanding global economy. Sterling however, pared much of yesterday’s gains after the EU’s head Brexit negotiator said that a post-Brexit transition period between the U.K. and the EU was not a given. The comments undermined some of the recent optimism surrounding the Brexit discussions that had pushed the pound to its highest level since mid-2016.
EUR: The euro was largely flat against the greenback overnight but remained on track for its second weekly decline this week as the recent spike in volatility was seen as hurting a key source of support for the single currency. Flows into euro zone stocks over the past year were a one of the drivers of the euro’s broad rise- a product of investors trying to capitalize on the 19-member bloc’s strong recovery. Falling stocks and fading risk appetite amid this week’s spike in market volatility undermined some of the euro’s recent gains.
CAD: The loonie, which had already fallen to its lowest level against the greenback since late last year amid the spike in global market volatility and the pullback in crude oil, fell further this morning after Canada’s January employment report showed a decline of 88,000 jobs last month, confounding expectations for gain of 10,000. It was the biggest loss of jobs since the financial crisis in 2009. Much of the headline loss in employment was due to a sharp drop in part-time workers last month. Wages spiked by 3.3% in January, but much of that was due to a rise in the minimum wage in Ontario, Canada’s most populated province. On balance, the news may have only a limited impact on the outlook for another BOC interest rate increase sometime around the middle of the year.
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