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Greenback stronger on trade optimism – all eyes on Bank of Canada

Albert Edwards
by Albert Edwards on September 03, 2019


U.S. dollar highlights:

USD strengthened to a one month high after China said they are discussing the next round of trade talks with the United States. Washington and Beijing are renewing negotiations in September and this has eased market concerns about the ongoing trade war and global slowdown. However, China’s commerce minister said the possibility of progress depends on whether the U.S. can create better conditions and cancel additional tariffs. President Trump softened his tone and predicted a deal can be reached soon, while the Treasury yield curve remains inverted (foreshadowing a possible recession). Meanwhile, the U.S. economy slowed more than expected in Q2 (despite the strongest consumer spending in 4.5 years). Unemployment rate for August available on Friday (expecting 3.7% and same as July).

Canadian dollar highlights:

CAD defensive as markets focus on the Bank of Canada’s monetary policy meeting this week. The central bank is expected to keep interest rates unchanged at 1.75%; however, chances of a rate cut has increased due to the ongoing trade war between U.S and China. Gross domestic product for June expanded 0.2% (and 3.2% annualized in Q2), confirming the economy rebounded from a previous slowdown; however, the Bank of Canada has remained on the sidelines while other central banks have eased interest rates. Oil prices have been affected most due to lower global demand and this has put pressure on CAD. The Energy Information Agency reported that commercial crude oil inventories decreased by 10 million barrels last week (compared to -2.1 million barrels expected). Unemployment rate for August also available on Friday (expecting 5.7% and same as July).

Euro highlights:

EUR dropped to a one month low as markets are expecting aggressive monetary easing by the European Central Bank. Economic data remains weak from reinforced views that the central bank would cut rates and announce a new round of quantitative easing during this month’s meeting. Manufacturing activity contracted for the seventh consecutive month in August, putting further pressure on the central bank. In addition, German inflation has slowed, and unemployment increased in August to increase fears of a recession in the Eurozone’s largest economy. GDP Growth Rate for Q2 available on Friday (expecting 1.2% growth annualized).

British pound highlights:

GBP continues to decline as concerns increased that the U.K. will have a disruptive no-deal Brexit. Parliament returns this week from a summer recess with less than two months remaining for the October 31 deadline to leave the European Union. Prime Minister Johnson’s move to suspend parliament resulted in the opposition Labour Party requesting an emergency debate this week. Protests outside of the Prime Minister’s residence and increased political tensions is causing market uncertainty making the GBP weaker.