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Greenback lower after trade talks stall - risk aversion returns

Currency-Market-Update-Friday-3
Albert Edwards
by Albert Edwards on July 19, 2019

CURRENCY MARKET UPDATE

USD weaker and failed to gain momentum as trade talks with China are not progressing. Equity markets are also weaker as 10-year yields also dropped and caused USD lower. After President Trump’s recent comments about China, markets are concerned the trade truce will end and more tariffs will be imposed. Initial Jobless Claims for last week was 216K (higher than 211K forecast and previously revised to 208K). The number of Americans filing for unemployment benefits increased by 8K. Meanwhile, the Philadelphia Fed Manufacturing Index for June increased to 21.8 (from 0.3 previously in May) and this was the highest in a year. New orders and shipments increased at a faster pace while employment growth was the strongest since October 2017. Optimism about economic growth for the next 6 months is increasing; however, markets will focus on central bank monetary policy and trade developments.

Canadian dollar highlights:

CAD strength the past week was mainly due to the Bank of Canada holding interest rates (in comparison to the Fed planning to cut rates). After Wednesday’s CPI reports, the economy is steady and reaffirmed the central bank’s dovish stance. Core Inflation remained at 0.1% monthly (as expected) and 2.0% yearly (worse than 2.6% gain expected, but on target); meanwhile, private businesses hired 30.4K workers in June (compared to -16K in May). Markets will focus on Retail Sales for May today (expecting 0.2% monthly and 4.1% yearly).

Euro highlights:

EUR falls further after the European Central bank said they will study a potential revamp of the inflation goal. The economy continues to suffer due to the Brexit delay. Markets interpreted this review as current monetary policy will remain and already pricing in a rate cut for later this year. European Union chief Brexit negotiator Michel Barnier said they are ready to work on alternative arrangements for the Irish border.

British pound highlights:

GBP steady after Retail Sales for June increased 0.9% monthly and 3.6% yearly (compared to -0.3% expected). In addition, parliament members passed an amendment to prevent a no-deal Brexit in October; meanwhile, chief Brexit negotiator Barnier’s comments also supported GBP. Bank of England Governor Mark Carney warned about the economic consequences of leaving the European Union without a deal and a recent study confirmed his statements. Markets are still concerned with Boris Johnson ready to be the next Prime Minister after he said Britain must leave the European Union by October 31, 2019 with or without a deal. Johnson has also refused to suspend parliament to prevent lawmakers from blocking his exit plan.

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