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Greenback stronger on political uncertainty and risk-off sentiment

Currency-Market-Update-Thursday-2
Albert Edwards
by Albert Edwards on September 26, 2019

CURRENCY MARKET UPDATE

U.S. dollar highlights:

USD stronger due to increased political tensions in the United Kingdom and U.S.A. In the U.K., parliament resumed activity after the Supreme Court ruling; meanwhile, U.S. House Speaker Nancy Pelosi announced the beginning of an impeachment process on President Trump. In addition, trade tensions resume after Trump criticized China (again).  Stocks are lower and demand for government bonds also caused yields to be lower, resulting in USD safe-haven status. Risk-off sentiment will dominate markets as the Democrats controlled Congress and Trump will now be in a political battle for months. An impeachment requires a 2/3 majority vote in the Republican controlled Senate (highly unlikely). Markets remain concerned about the trade dispute with China, geopolitical concerns in the Middle East and a global economic slowdown. In addition, the Department of Treasury announced new sanctions on Iran and on Chinese entities. GDP for Q2 expecting 2% growth today (previously 3.1%).

Canadian dollar highlights:

CAD weaker as oil prices continue to lower and increased political risks is causing USD higher. Markets are concerned about Saudi Arabia’s efforts to restore production after recent attacks. Crude oil stocks increased by 2.412 million barrels last week (previously a 1.058 million gain). CAD is also vulnerable to trade developments between China and U.S. as fears of a global slowdown will affect demand for crude oil. President Trump criticized China’s trade practices and said he won’t take a “bad deal”; meanwhile, earlier this week he said the dispute could be resolved “sooner than you think”.

Euro highlights:

EUR tumbles after European shares drop and the Eurozone’s deteriorating economic outlook. Negative German Business sentiment is lowering the EUR as the German economy is expected to shrink in Q3 and be stagnant in Q4. Despite more monetary stimulus from the central bank, the economy continues to suffer (due to global slowdown and Brexit uncertainty risks). Markets have already priced in another interest rate cut before the end of this year.

British pound highlights:

GBP defensive after parliament resumes and more Brexit uncertainty. After the Supreme Court ruled Prime Minister Johnson’s suspension of parliament was illegal, GBP strengthened; however, the Labour Party will not support a vote of no confidence. Johnson still plans to push a no-deal Brexit before the new elections, but parliament will use the recent law to avoid leaving the European Union without a deal. Another extension is the most likely scenario as political chaos will determine GBP direction.

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