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Greenback stable as risk appetite returns amid currency manipulation

Currency-Market-Update-Wednesday-3
Albert Edwards
by Albert Edwards on August 07, 2019

CURRENCY MARKET UPDATE

U.S. dollar highlights:

USD trending higher after increased market concerns regarding the trade dispute with China. Treasury Secretary Steven Mnuchin officially labelled China as a currency manipulator and will engage the International Monetary Fund. Last week, President Trump announced an additional 10% tariffs on Chinese goods (starting in September) and China said they will retaliate. China responded by manipulating its currency higher. After the People’s Bank of China set the Yuan stronger than expected, risk appetite returned. A weaker yuan helps exporters and reduces some of the effects of Trump’s tariffs; however, a weaker yuan also hurts the economy. As a result, China’s revaluation of the CNY caused global stocks to fall and lower yields increased the chances of the Federal Reserve cutting interest rates again in September.

Canadian dollar highlights:

CAD defensive due to U.S.-China trade developments and lower oil prices. CAD has been under pressure the past week after President Trump announced he will impose additional tariffs on China. Meanwhile, the 10-year government yield curve dropped to its most inverted level since 2000. Inflation remains close to the 2% target and the economy continues to grow; however, chances are increasing that the Bank of Canada will also cut interest rates (due to global trade tensions). Markets have started to price in a rate cut by December or early 2020.

Euro highlights:

EUR stable after German factory orders increased by 2.5% monthly in June (strongest in 2 years). Eurozone Services Index reading was 53.2 in July (expected 53.3 and previously 53.6 in June); meanwhile, employment growth was the weakest since March. Business confidence improved to the highest level in three months during July.

British pound highlights:

GBP remains vulnerable (until October 31) as the probability of a general election after the Brexit deadline increased. Markets are also concerned about a disorderly Brexit affecting the economy into a possible recession. The Conservative party only has one seat in parliament after last week’s by-election Liberal victory. Focus for GBP will be if new Prime Minister Boris Johnson leaves the European Union (with or without a deal) and central bank monetary policy.

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