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Greenback Tumbles After Neutral BoC and No-Deal Brexit Blocked

Currency-Market-Update-Thursday-1
Albert Edwards
by Albert Edwards on September 05, 2019

CURRENCY MARKET UPDATE

U.S. dollar highlights:

USD dropped after the Bank of Canada’s neutral stance regarding monetary policy. Markets were expecting a dovish tone and no-deal Brexit risks have diminished. Weak Manufacturing data (suggesting a recession) also weighed on USD. Hong Kong’s leader formally withdrew the extradition legislation that caused increased tensions, protests and riots. Meanwhile, the trade conflict with China continues and global growth slowdown fears persist. The trade deficit narrowed to $54 billion in July (from a revised 55.5 billion in June); exports increased 0.6% and imports decreased 0.1%. All eyes on the August jobless rate available tomorrow.

Canadian dollar highlights:

CAD stronger after the central bank kept interest rates unchanged at 1.75% (as expected). The economy is close to potential and inflation is on target; however, the economy is expected to slow in the second half of 2019. The escalating trade conflict between China and U.S. is also affecting the economy and the current degree of monetary stimulus is appropriate. In addition, the central bank said the housing recovery may add to already high debt levels and business spending contracted sharply after a strong Q1. The Federal Reserve, European Central Bank and Bank of England are all planning to cut interest rates to boost the economy and inflation; however, the Bank of Canada has remained patient (and data dependent) and this has provided support for CAD (while oil prices are lower). Markets were expecting Chairman Stephen Poloz to forecast a willingness to cut rates.

Euro highlights:

EUR remains defensive and vulnerable after the European Central Bank President nominee Christine Lagarde was dovish and said that inflation was too low and accommodative policy was needed. Lagarde also warned about the “negative effects” of policies so markets interpreted this as not a significant amount of easing expected. A rate cut has already been priced in for the remainder of 2019 and this has also kept EUR lower. Eurozone Retail Sales decreased 0.6% monthly in July but increased 2.2% annualized (mostly due to a decline in clothing sales).

British pound highlights:

GBP recovering after Prime Minister Boris Johnson was defeated in parliament and lost control of the House’s agenda (and his Conservative party). Parliament members approved a motion to force the government to avert a no-deal Brexit. Former Prime Minister Theresa May experienced backlash from Brexiteers and Johnson is now dealing with the Remainers. Many Conservatives voted against the government and were expelled from the party. Without a majority, Johnson demanded an election and will have difficulty passing his no-deal Brexit and this has eased market concerns. However, lawmakers rejected Johnson’s motion to dissolve parliament and call an early election.

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