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Greenback defensive on increased trade tension and global recession fears

Currency-Market-Update-Friday-1
Albert Edwards
by Albert Edwards on August 16, 2019

CURRENCY MARKET UPDATE

USD under pressure after President Trump’s latest comments regarding the events in Hong Kong increased tensions with China. Trump tried to link the turmoil in Hong Kong with the trade war. In response, China said the U.S. tariffs are a violation of an accord reached by Presidents Xi Jinping and Trump. China also vowed to retaliate, which caused markets to be concerned that a trade deal will not be finalized soon. On Tuesday, Trump said his administration would delay new tariffs until December 15 (causing equity markets to increase); however, by Wednesday stocks declined after weak economic data from Europe and Asia and the yield curve inverted. Trump may be forced to end the trade war soon due to the risk of a global recession. Initial Jobless Claims for last week was 220K (higher than expected 215K and previously revised to 211K). Retail Sales for July increased 0.7% monthly and 3.4% yearly. However, Industrial Production disappointed at 0.5% (expected 1.2%) and Manufacturing Production also dropped 0.4% (versus -0.2% expected).

Canadian dollar highlights:

CAD remains vulnerable to crude oil prices and central bank policy. Oil prices dropped to the lowest level in a week as the trade war between the world’s two biggest economies escalates. China said it “has no choice but to take necessary measures to retaliate” against Trump’s planned tariffs on December 15. As a result, the Bank of Canada’s easing expectations are increasing. American crude oil stockpiles expanded by almost 4 million barrels during the past two weeks to put further pressure on demand. Meanwhile, private businesses hired 73.7K people in July and 190K ne motor vehicle sales fort June (previously 207K in May).

Euro highlights:

EUR decline continues as German yields continue dropping and markets expect further monetary easing from the European Central Bank (during the next meeting in September). The central bank needs to take more action to boost the economy and markets are expecting a rate cut soon. The German government expects a disorderly Brexit on October 31 and the European Commission will not negotiate another extension. Equity markets in Europe are also falling due to global slowdown fears. Consumer Prices for July available Monday (expecting 1.1% yearly).

British pound highlights:

GBP recovering after July Retail Sales was 0.2% monthly (versus -0.2% expected) and 3.3% increase year over year (versus 2.6% expected). Meanwhile, Labour party leader Jeremy Corbyn appealed to opposition parties to make him the caretaker Prime Minister to avert a no-deal Brexit. Political turmoil is delaying the chances of an orderly Brexit by the end of October and affecting GBP.

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