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Greenback strong on global growth concerns

Currency-Market-Update-Monday-3
Albert Edwards
by Albert Edwards on September 23, 2019

CURRENCY MARKET UPDATE

U.S. dollar highlights:

USD firm as trade talks with China progress and the Federal Reserve was hawkish last week regarding monetary policy. Markets expected the Fed would be aggressive with further interest rate cuts (after two already this year), however, a strong economy and inflation near target has caused the central bank to be more patient. Risk sentiment is positive and stocks continue rising at record highs (due to encouraging signs of trade developments). Deputy trade negotiators for both U.S. and China continue meeting to prepare for higher-level negotiations next month. The world’s two biggest economies have been in a trade war for over a year, causing many other countries to suffer economically. Meanwhile, St. Louis Fed President James Bullard said he supported a 50bps cut (instead of 25bps) because the manufacturing sector may already be experiencing a recession. Markets will focus this week on the GDP Growth Rate report for Q2 (available Thursday).

Canadian dollar highlights:

CAD weaker after Retails Sales for July was less than expected. Due to stronger sales of new cars, retail sales advanced for the first time in three months, but only increased 0.4% (versus 0.6% forecast). Oil prices remain high to support CAD due to escalated tensions in the Middle East after last week’s drone attack on a main Saudi Arabian supply hub. Markets will focus this week on trade developments, oil prices and global slowdown concerns.

Euro highlights:

EUR remains defensive due to the impact of Brexit and trade war risks on the manufacturing sector. Consumer confidence improved in September but is still low (-6.5). The German Finance Ministry said the economy started Q3 weaker than expected and unemployment is increasing. The Eurozone’s largest economy is facing a potential recession and keeping EUR low. Markets will focus this week on European Central Bank President Mario Draghi’s speeches today and Thursday.

British pound highlights:

GBP strengthened to a two-month high after European Commissioner Jean-Claude Juncker said a deal could be reached; however, Irish Foreign Minister Coveney said a deal is not close. The main issue is the controversial backstop, as the Brexit roller coaster continues. Last week, the central bank kept interest rates unchanged at 0.75% (as expected) but warned that a no-deal Brexit will continue damaging growth. GBP will remain vulnerable to Brexit developments and the supreme court’s final decision regarding Prime Minister Johnson’s suspension of parliament.