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Greenback defensive after new trade concerns causing risk aversion

Currency-Market-Update-Friday-2
Albert Edwards
by Albert Edwards on November 01, 2019

CURRENCY MARKET UPDATE

U.S. dollar highlights:

USD under pressure after China said they doubt a trade deal will ever be reached. This caused yields to drop and put pressure on stocks. The Federal Reserve implemented a hawkish interest rate cut on Wednesday and Chairman Jerome Powell said that low inflation would preclude any future increase. Powell dropped any reference that the Fed “will act as appropriate” to keep the economy growing and markets interpreted this as the rate-cut cycle is ending. Meanwhile, the Chinese Manufacturing sector contracted for the sixth month and China’s service sector also slowed in October due to weak domestic demand. Consumer spending in the U.S. increased 0.2% in September (versus 0.3% expected) and Initial Jobless Claims last week was 218K (higher than expected 215K and previously revised to 213K). All eyes on the Unemployment Rate and Non-Farm Payrolls report for October today.

Canadian dollar highlights:

CAD stable after the Bank of Canada left interest rates unchanged on Wednesday, however, there is now a 75% chance of a rate cut by the end of 2020 (from 50% previously). Governor Stephen Poloz said the central bank was considering an “insurance” cut to deal with geopolitical and economic concerns; however, they decided to remain stable to ensure inflation does not exceed the 2% target and to keep household debt from increasing. Meanwhile, GDP for August was only 0.1% (versus 0.2% growth expected). Producer Prices decreased 0.1% monthly (after 0.2% increase previously in August) and dropped 1.3% year over year.

Euro highlights:

EUR weaker and remains defensive to Brexit developments. Eurozone expanded 0.2% in Q3 as Germany avoided a recession; however, this is still the slowest growth since 2013. Inflation remains below target after slowing to 0.7% yearly in October (versus 1.1% expected). The Unemployment Rate for September was 7.5% (same as previous and higher than expected 7.4%). All eyes on new central bank President Christine Lagarde.

British pound highlights:

GBP stable as the latest polls show the Conservatives increasing support for next month’s election. Meanwhile, the opposition Labour party’s support is decreasing and this is good for Prime Minister Boris Johnson’s Brexit deal getting approved. Markets also interpreted this as lowering the chance of a no-deal Brexit. All eyes on the Bank of England’s policy meeting next week with a 50% chance they will follow the Federal Reserve and cut interest rates.

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