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Greenback tumbles as trade tensions intensify

Currency-Market-Update-Monday-2
Albert Edwards
by Albert Edwards on August 26, 2019

CURRENCY MARKET UPDATE

U.S. dollar highlights:

USD defensive as markets scale back expectations for aggressive interest rate cuts from the Federal Reserve. The central bank said last week they saw no reason to cut rates without new economic deterioration. Fed meeting minutes also revealed some policymakers disagreed on the rate cut last month. The Fed is currently dealing with deciding on appropriate monetary policy and pressure from President Trump for more rate cuts. Although a rate cut is already priced in for next month, Powell gave no clues on what to expect at the next policy meeting. Powell said the economy is in a “favorable place” and the Fed will “act as appropriate”. Meanwhile, the prolonged trade war escalated after China imposed more tariffs on American goods and Trump responded by ordering U.S. companies to start looking for an alternative to China. Increased tensions caused Treasury yields to drop to their lowest level in a week and lots of USD selling, which dropped the greenback from a 3-week high.

Canadian dollar highlights:

CAD under pressure due to oil prices dropping after China retaliated with $75 billion worth of tariffs on U.S. goods (including crude oil). After a decrease in U.S. crude inventories and OPEC supply cuts, oil prices increased last week, however, CAD strength was limited due to global economic concerns. Meanwhile, gold prices increased 2% as markets interpreted Fed Chairman Powell’s speech last week as dovish and Trump’s latest comments increased trade tensions. Stronger than expected economic data was offset by reduced risk appetite after U.S. stocks dropped. Canada’s economy will be hurt by a global slowdown because oil is one of many commodities exported. Retail Sales for June and Inflation were both higher than expected.

Euro highlights:

EUR lower as trade war fears caused investors to sell after the Chinese yuan dropped to an 11-year low. An increase in Eurozone business growth was offset as services expanded but manufacturing contracted. Hopes of avoiding a snap election in Italy can be avoided also keeping EUR defensive. Italian President Sergio Mattarella gave the arguing parties five days to agree on a deal to resolve the political crisis and avoid an election.

British pound highlights:

GBP support due to German Chancellor Angela Merkel’s statement last week that a solution to the Irish border issue could be reached before the October 31 deadline to leave the European Union. Merkel also said that the U.K. must propose border solutions soon while the German ministry said the economy is not in recession (despite contraction in Q2). Previously, markets were concerned that Prime Minister Boris Johnson would leave without a deal, however, any positive developments to convince the European Commission to renegotiate will strengthen GBP again.

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