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Greenback defensive on dovish Fed minutes

Albert Edwards
by Albert Edwards on August 22, 2019


U.S. dollar highlights:

USD under pressure after the latest FOMC meeting minutes confirmed that most Fed officials viewed the July rate cut as the beginning of a cycle. The Fed saw the July rate cut as insurance for growth against the trade war with China. President Trump blamed the Fed for the “highest dollar in U.S. history”. Trump also said he will “probably’ make a deal with China and this is giving USD support. Increasing fears of a recession will also cause the Fed to eventually cut the full 100bps that Trump wants; meanwhile, the trade war will also cost consumers. Trump may have to end the trade war and settle with China (after delaying tariffs until December and Huawei extension). In return, China has not purchased agricultural goods (as promised) and will remain patient. The combination of a rate cut and deal with China will strengthen Trump’s re-election campaign. Existing Home sales for July was 5.42 million/2.5% increase monthly. Markets will now focus on Fed Chairman Powell’s speech tomorrow in Jackson Hole.

Canadian dollar highlights:

CAD stable after Consumer Prices for July were higher than expected 0.5% monthly and 2% yearly. Core inflation was 2% year over year (versus 1.7% expected and previously 2% in June). A slowdown in cost of services was offset by a rise in durable goods prices and food. Markets are still trying to determine if the Bank of Canada will follow the Fed and cut interest rates next month. Oil prices are firm to also support CAD; meanwhile, crude stocks in the U.S. decreased by 2.732 million barrels last week (after 1.58 million increase previously).

Euro highlights:

EUR stable after German Chancellor Angela Merkel suggested the European Union would look at “practical” Brexit solutions. Merkel is still hopeful the Irish backstop issue can be resolved. Italian political tensions are preventing any EUR strength currently as Prime Minister Conte tried to avert new elections.

British pound highlights:

GBP remains weak after the U.K. budget confirmed a 60% increase in government borrowing in Q1. Weaker revenues and slower growth are impacting government finances, while Brexit uncertainty still exists. Prime Minister Johnson will visit Berlin and Paris with no-deal concerns increasing and causing GBP lower.