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Greenback firm as trade concerns ease and risk appetite returns

Currency-Market-Update-Friday-3
Albert Edwards
by Albert Edwards on August 30, 2019

CURRENCY MARKET UPDATE

U.S. dollar highlights:

USD remained stable as markets are calm after China said they will not retaliate against the latest U.S. tariffs (for now). China said they are willing to resolve the trade war with a “calm attitude”. Treasury Secretary Steven Mnuchin also expressed optimism regarding new talks with China (in addition to President Trump’s positive statements earlier this week). Markets reacted with U.S. bond yields recovering and chances of bigger rate cuts by the central bank have reduced. USD will strengthen on positive trade progress, however, returning to threats of tariffs will increase tensions and weaken the greenback. Meanwhile, Q2 GDP expanded 2% as expected (mainly due to government spending); Initial jobless claims for last week was 215K (as expected and previously revised to 211K).

Canadian dollar highlights:

CAD strength was limited due to risk appetite as markets focus on the Bank of Canada’s monetary policy decision next week. Average weekly earnings in June increased 2.5% yearly (after a 3.4% increase previously in May). The Energy Information Administration confirmed lower U.S. crude inventories which kept prices down. Focus will be on June GDP today (expecting 0.2% growth monthly and 2.3% in Q2 annualized). Producer prices for June decreased 1.7% yearly and expecting -1.2% for July (also available today).

Euro highlights:

EUR remains defensive and vulnerable after Germany’s Consumer Prices dropped to 1.4% in August (versus 1.5% expected). Italy’s 5-Star Movement and Democratic Party agreed to form a coalition government and President Mattarella officially gave Prime Minister Conte the mandate. Markets were initially concerned Italy would call an election and create uncertainty. Inflation rate for July expecting 1% today and July unemployment expecting 7.5%.

British pound highlights:

GBP continues to drop after Prime Minister Johnson’s decision to prorogue parliament. Scottish Tory leader Ruth Davidson resigned, and another Conservative senior leader is also expected to leave due to the suspension of parliament. The Remainers and members against a no-deal Brexit may unite against Johnson as he pushes for a hard Brexit by October 31. Markets are expecting increased volatility amid political tensions and GBP will continue to weaken.

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