It has been a challenging week for the U.S. dollar. The greenback fell to fresh 2.5-year lows against most of the major currencies, but as the week drew to a close, it finally rebounded. While some may hope that this marks a bottom for the U.S. dollar, there’s scope for further losses in the coming week. Vaccine progress and the prospect of a stimulus deal are some of the main reasons for the dollar’s weakness, and that is not expected to change. Stimulus talks are progressing and there’s talk that an agreement may be reached over the weekend. While it falls significantly short of the support offered in March, it would provide millions of Americans with much needed relief. Moderna is on track to have its vaccine approved by the Food and Drug Administration, making it the second vaccine available to the American public. This could happen as early as Monday. So the rally in equities next week could be renewed by the combination of positive stimulus and vaccine news. If that happens, the greenback could see fresh losses.
No U.S. economic reports were released on Friday, but outside of housing, U.S. data has surprised mostly to the downside. Next week, revisions to Q3 GDP, personal income, personal spending, existing and new home sales are due for release. Housing data should hold steady, but income and spending should be softer. With that said, the primary driver of dollar flows will be year-end position adjustments, stimulus and vaccine news. Short covering after a strong move this year is one of the few reasons why the dollar could extend its recovery in the coming days.
The euro snapped a four-day rise despite another piece of better-than-expected data. The German IFO business climate index rose to 92.1 from 90.9 with improvements in both the current conditions and expectation components. Throughout this month we’ve seen consistent upside surprises in Eurozone data that justifies the currency’s rally. Thus far, the impact of nationwide lockdowns have been limited and, while there’s still risk of weak data in December, for the time being, economists (us included) underestimated the region’s resilience. With no major Eurozone economic reports scheduled for release next week, the market’s appetite for U.S. dollars will be the primary driver of EUR/USD flows.
The pullback in sterling on Friday was more significant as Brexit headlines grow more negative. Talks continue, but with less than two weeks before Britain is scheduled to leave the European Union, they are no closer to a deal. This morning the European Commission admitted that it is unknown if or when there will be a deal, and that seems to be the view shared by UK officials. Fishing rights are still the main obstacle. It is a fraction of UK GDP (0.15%) but a highly emotional issue because Britons believe that British fishing grounds are “first and foremost” for British ships, but the EU also wants access for its boats. Quotas are set on the volume of fish that can be caught each year, and the UK wants to control who can fish in its waters. The EU, on the other hand, is under significant pressure to maintain current quotas because of the plentifulness of UK seas. Its such a big point of contention that the Brexit deal could live or die on fish. Stronger UK retail sales may be the only reason why sterling did not see a bigger decline on Friday.
All three commodity currencies saw end-of-week losses, with the Canadian dollar leading the slide. Retail sales in Canada was mixed, with spending rising 0.4% in the month of October. The headline number was better than expected, but excluding auto purchases, spending growth stagnated. USD/CAD started to trend higher on Thursday evening but it catapulted upwards after retail sales. Canada’s October GDP report is the only piece of noteworthy data scheduled from the commodity producing countries next week.