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Greenback defensive as markets focus on trade talks

Albert Edwards
by Albert Edwards on July 14, 2019


USD under pressure after White House advisor Peter Navarro said they are currently in a “quiet period” with China regarding trade talks. The world’s two biggest economies have called a trade truce on tariffs and markets are hoping a resolution is finally near. Chinese growth is expected to moderate to 6.2% (from 6.4%) in Q1. During the past week, USD weakness has been due to higher oil prices and central bank monetary policy. Despite an increase in Treasury bond yields, the greenback failed to attract any buyers. The Federal Reserve is expected to cut interest rates later this month after last week’s meeting minutes revealed many policymakers support this decision. Retail Sales for June available tomorrow (0.2% increase expected, but lowest since February). Fed Chairman Jerome Powell also speaks on Tuesday.

Canadian dollar highlights:

CAD strength continues with support from higher oil prices. Crude inventories in the U.S. declined for the fourth consecutive week and U.S. producers in the Gulf of Mexico have cut more than half their output (due to a tropical storm). The Bank of Canada remains patient and will hold interest rates in contrast to the Fed; meanwhile, Governor Poloz stated rate cuts are no cure-all in a trade war. Markets will focus this week on Wednesday’s Inflation Rate for June (expecting 0.4% monthly and 2.1% Core); Retail Sales for May available Friday (expecting 3.7% gain yearly).

Euro highlights:

EUR remains under pressure as the central bank repeated the need to act regarding monetary policy. Francois Villeroy de Galhau is the latest member to support a rate cut; meanwhile, other members have expressed that further expansionary measures will be needed if the Eurozone economy does not improve. In addition, concerns about German Chancellor Angela Merkel stepping down have increased due to her health. Markets will focus this week on the Inflation Rate for June available Wednesday (expecting 0.1% monthly and 0.8% Core).

British pound highlights:

GBP defensive due to the risk of a no-deal Brexit increasing and central bank members supporting a dovish stance. Bank of England member Gertjan Vileghe said that rate cuts are more likely than hikes if the U.K. leaves the European Union without an agreement. Vileghe also said the economic outlook has deteriorated in recent months (similar to Governor Carney’s statement last week). Boris Johnson is firmly in the lead and expected to win the Conservative Party leadership. The final results are due July 23 (unless Jeremy Hunt steps down). Unemployment Rate for May available tomorrow and Inflation Rate for June available Wednesday.