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Greenback firm due to risk aversion – focus on BoC policy decision

Currency-Market-Update-Wednesday-1
Albert Edwards
by Albert Edwards on September 04, 2019

CURRENCY MARKET UPDATE

U.S. dollar highlights:

USD strength continues as risk appetite weakens due to Brexit uncertainty and positive trade developments with China. President Trump refused to delay the latest round of tariffs (effective September 1, 2019) and both sides agreed to schedule talks for later this month. After Trump’s 15% tariffs on $112 billion in Chinese goods, Beijing retaliated with higher tariffs on $75 billion of U.S. goods. China’s Vice Premier Liu said he firmly opposes a trade war. Renewed hopes of a potential deal between the world’s two biggest economies has helped the greenback reach the highest level in eight weeks. However, if negotiations are cancelled markets will respond with other safe havens and the Federal Reserve will be under pressure to cut interest rates. Meanwhile, the ISM Manufacturing Index reading contracted to 49.1 (3 year low) and indicated a recession.

Canadian dollar highlights:

CAD soft and under pressure due to lower oil prices after an increase in OPEC output. Crude oil supply increased (mostly from Iraq and Nigeria) while demand concerns decreased due to the ongoing trade war. All eyes on the Bank of Canada’s Interest Rate decision today as markets are expecting the central bank to eventually follow the Fed and cut rates. A dovish policy statement will drop CAD further, however, a neutral stance is more likely. Focus will also be on the Unemployment Rate for August (expecting 5.7% on Friday).

Euro highlights:

EUR weaker as markets focus on the European Central Bank’s prospects of monetary easing. The central bank is expected to also lower interest rates and re-introduce quantitative easing to boost the economy and inflation. Eurozone Producer Prices increased 0.2% in July (as expected). Retail Sales for July expecting 2% increase annually tomorrow and GDP Growth rate for Q2 expecting 1.1% growth annualized on Friday. Increased fears of a recession weighing on the EUR (especially in Germany) and central bank members will meet next week to discuss the level of stimulus needed.

British pound highlights:

GBP tumbles as opposition parties pass a no-deal Brexit legislation before an election. Prime Minister Johnson threatened to call an early election for October 14 after losing majority. A no-deal Brexit would hurt the economy and lawmakers are determined to prevent this from happening; however, Johnson has vowed to leave the European Union by October 31, “do or die”. Last week the Queen approved Johnson’s request to suspend parliament for 5 weeks and the response caused GBP lower and under pressure.