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Greenback stronger on delayed tariffs despite inverted yield cure

Currency-Market-Update-Thursday-1
Albert Edwards
by Albert Edwards on August 15, 2019

CURRENCY MARKET UPDATE

USD gaining strength after the White House announced a delay of the new 10% tariffs on Chinese imports (from September 1 to December 15, 2019). Two weeks ago, President Trump said his tariffs only affect China, but easing these new tariffs will help American shoppers before Christmas. Trump’s reversal has sent stocks and USD higher, while the chances of the Federal Reserve cutting rates again has reduced. In addition, the 10-year yield curve has inverted for the first time since 2007 which caused a flight to safety; however, concerns about a recession have increased. Export Prices for July increased 0.2% monthly, but dropped 0.9% yearly; meanwhile, Import Prices also increased 0.2% monthly and dropped 1.8% year over year. Markets will focus on Retail Sales data for July available today (expecting 3.2% gain).

Canadian dollar highlights:

CAD weaker and defensive after crude oil prices dropped below $55.00 per barrel. The Energy Information Administration reported U.S. crude oil stocks increased by 1.580 million barrels last week (following a 2.385 million increase the previous week). Markets were expecting a decline of 2.775 million barrels so more supply and low demand (due to global slowdown from trade tensions with China) affecting CAD lower. Private businesses are expecting to hire 28K today for (after adding 30.4K in June) and 192K New Motor Vehicle Sales for July.

Euro highlights:

EUR soft after German Chancellor Angela Merkel said the economy is entering a “difficult phase” and they “will react depending on the situation”. Markets are expecting more fiscal stimulus as the 10-year yield reached a new low of -0.62%. Germany is suffering from the global economic slowdown and lower demand from China. EUR is also under pressure after the Italian Senate announced they will hold a vote of non-confidence on August 29 and new elections are possible. Trade tensions, Italian politics and speculation about a Eurozone recession will continue to affect EUR.

British pound highlights:

GBP remains under pressure and vulnerable after the economy contracted by 0.2% in Q2. Markets are also concerned about a recession in the U.K. with the yield curve inverted. Consumer Prices for July were all higher than expected at 0% monthly and 2.1% yearly (Core Inflation was 1.9% year over year). Retail Sales for last month expecting 1% monthly and 3.8% increase yearly today. Meanwhile, Prime Minister Boris Johnson said the European Union is not compromising on an extension. With less than 2 months before the Brexit deadline, the U.K. may leave without a deal and drop GBP further.

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