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Euro loses traction ahead of ECB meeting

London

GLOBAL forex markets were overshadowed by the continued decline in volatility, lending a boost to higher-yielding currencies such as the US dollar and emerging markets.

Focus has turned to meetings at the European Central Bank (ECB) and the Bank of Canada (BOC), with both institutions facing the need to address stuttering economic growth and a slowdown in world trade.

The euro held near one-week lows versus the dollar at US$1.1318 on expectations that the ECB's Thursday meeting would hint at delaying hiking rates until next year and soon re-launch long-term bank loans to tackle economic slowdown.

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Market voices on:

"The ECB's new projections on Thursday might paint a more subdued picture than before," Commerzbank analyst Antje Praefcke said, adding the euro appeared to be "aiming for the $1.13 mark".

The Canadian dollar slumped to nearly six-week lows on Tuesday, hit by a combination of trade troubles, resignations from Prime Minister Justin Trudeau's cabinet and expectations that the central bank could be on the cusp of changing its policy direction. The Canadian currency fell 0.3 per cent to C$1.3350 (S$1.3509) against the greenback, extending Monday's losses.

The BOC is expected to hold rates this week at 1.75 per cent but many reckon it is edging towards a cut later in 2019. A month ago, it was seen raising rates twice in 2019.

"The Bank of Canada are probably at the place where they are starting to feel concerned...I can see the Canadian dollar weakening a bit more as I think underperformance of the Canadian economy is not at an end," said Charles St Arnaud, senior investment strategist at Lombard Odier.

Latest data showed Canadian growth slowed sharply to 0.4 per cent on an annualised basis in the fourth quarter of 2018, versus the 1.2 per cent forecast.

Ties with China are also under strain over trade and technology issues.

The US dollar stood close to a two-week high against key peers at 96.726, supported by higher US Treasury yields. It had rallied on Monday to 96.816, its strongest since Feb 19.

Investors are seeking out higher-yielding currencies as price volatility in the world's most-traded currencies has plummeted following a dovish shift by major central banks.

Implied one-month volatility on the euro is close to the lowest since 2014, while Deutsche Bank's Currency Volatility Index is near record lows of 6.66 hit in January 2018. REUTERS