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Greenback defensive after mixed trade messages – all eyes on GDP

Albert Edwards
by Albert Edwards on August 27, 2019


U.S. dollar highlights:

USD trending lower after President Trump said that China called the U.S. negotiators to continue talks. China’s Vice Premier Liu He said they are willing to resolve the trade dispute. Last week, the world’s two biggest economies both retaliated with tariffs and tensions escalated; however, this week markets are hoping for calmer trade negotiations. President Trump also criticized Federal Reserve Chairman Jerome Powell last Friday for “doing nothing”. Trump wanted the Fed to cut interest rates further (to 1%). Powell said the central bank would “act as appropriate” and dropped the words “mid-cycle adjustment” from explaining the previous rate cut in July. Markets interpreted the Fed removing cautious language implied another rate cut, despite the economy doing well. Trump also said he was having second thoughts on Chinese tariffs (including levying more), but China called and “wanted to make a deal”. Trade optimism will strengthen USD while increased trade tensions continue to affect USD lower. Markets will focus this week on Q2 GDP available tomorrow.

Canadian dollar highlights:

CAD stable after positive economic data last week. Oil prices remain firm after positive trade developments recently (after dropping last week due to global growth concerns). Markets will also focus on Q2 GDP Growth Rate (available Friday). The Bank of Canada is under pressure to also cut interest rates and follow the Fed, however, the economy is strong.

Euro highlights:

EUR soft after recent economic data suggested that Germany is on the verge of a recession and its lenders refuse to consider monetary stimulus. The Eurozone’s largest economy has been suffering due to Brexit (especially in the manufacturing and automobile sectors). Germany is also dependent on exports to China so the trade war with U.S. is also affecting the economy. Germany’s IFO survey also reflected low business confidence due to slow domestic growth. Markets will focus this week on Consumer Prices for August and the Unemployment Rate for July (both available Friday).

British pound highlights:

GBP remains defensive as Brexit talks overshadowed the G7 meeting in France over the weekend. Prime Minister Boris Johnson suggested that a no-deal Brexit would mean the United Kingdom would not be obliged to pay the European Union the Brexit “divorce bill” (€39 billion). The European Union said it expected the U.K. to honour its commitments and reminded that they could block trade deals if they reneged on the payment. The Irish backstop issue continues to be the main issue to resolve Brexit and German Chancellor Angela Merkel is confident an agreement will be done by the October 31 deadline.