Canada’s dollar collapsed to its weakest level since February 2010 after the Bank of Canada unexpectedly changed its interest rate guidance while marking down its growth outlook which caught markets by surprise. The US dollar’s dive to a two year low against the euro suggests there are no doubts about US monetary policy, with expectations pointing the Federal Reserve towards a taper rethink in its meeting later this month and the US dollar towards new lows. The euro’s rise is driven largely by risk appetite but also confidence that Europe’s economy is now moving in a positive direction. Sterling fell to a six-week low against the rising euro but could lean on UK industrial data for support before the all-important UK GDP data.
Sterling
The British pound tumbled to a six-week low against the euro after a stampede of macroeconomic themes trumped focus on the UK economy ahead of today’s GDP report. Despite concerns about tightening credit conditions in China, markets appear to be focusing very much on the outlook for US monetary where many investors believe the US government shutdown will have pushed stimulus tapering out to at least the first quarter of 2014. This is proving bullish for risky assets and in particular the eurozone. The single currency rose to its highest in two years against the US dollar. Sterling could find some interest following industrial data which the Confederation of British Industry will publish, although the pound’s longer-term direction will probably centre on the first estimates of third quarter UK GDP.
US dollar
The US dollar just can’t shake off talk of a delay in Federal Reserve stimulus tapering at the moment, with the greenback down to a two year low against the euro as investors flush out trades that were set up in anticipation of a reduction in US money printing at some point over the next month or two. The US dollar’s value against a basket of currencies is now at February lows and has fallen sharply since the Fed surprised markets by not announcing a reduction in monetary easing back in September. Markets now expect the US government shutdown to force the Fed into a taper rethink, and continue to debase the US currency through asset purchases for longer.
Euro
The euro surged to a two year high against the US dollar and extended gains against several other currencies despite a warning for Europe’s banks from Mario Draghi, ahead of data forecast to show a stronger euro zone economy. Demand for the euro comes as markets expect eurozone PMI surveys to show further recovery in the region’s services and manufacturing industries.