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Markets continue to be dominated by US/China trade

Currency-Market-Update-Monday-3
Albert Edwards
by Albert Edwards on August 12, 2019

CURRENCY MARKET UPDATE

U.S. dollar highlights:

USD under pressure as trade tensions escalated after the United States held off granting licenses to China’s Huawei Technology. President Trump said trade talks were pursuing, however, he was not ready to make a deal. Trump also repeated his stance for a weaker dollar to help American manufacturers. This stand-off with Federal Reserve Chairman Jerome Powell will keep USD strength limited as markets anticipate another rate cut in September. Treasury yields also continue to decline as a result of trade worries and political uncertainty. The People’s Bank of China fixed the yuan to a stronger level than expected last week in response to Trump’s latest tariffs, increasing risk appetite. Markets will focus this week on the July Inflation rate (available tomorrow) and Retails Sales (available Thursday).

Canadian dollar highlights:

CAD weaker after disappointing July jobs data last week. The number of employed people unexpectedly decreased by 24K last month. In addition, the Unemployment Rate increased to 5.7% (from 5.5% in June) and this put more pressure on CAD. The Housing sector remains solid with 222K starts yearly (versus 202K expected). CAD is still dependent on crude oil prices and central bank policy. Falling oil prices could result in production cuts and lower CAD. Markets will focus on next July’s Inflation Rate and June Retail Sales (available next week).

EUR highlights:

EUR weakness continues after slow German Industrial Production last month and increased political tensions in Italy. Markets are concerned about the collapse of the Italian government after Matteo Salvini may dissolve the coalition with the left leaning 5-Star Movement party. The only option now is an election and Salvini wants to replace current Prime Minister Guiseppe Conte. Italy’s political turmoil and high debt is affecting the Eurozone economy and keeping EUR defensive. Markets will focus this week on the GDP Growth Rate for Q2 and Industrial Production for June (available Wednesday).

British pound highlights:

GBP tumbles lower after the economy shrank for the first time since 2012 (increasing fears of a recession) . This unexpected contraction also increased market fears that a no-deal Brexit is inevitable. Prime Minister Johnson has repeatedly said the U.K. will leave the European Union in less than three months, with or without a deal. Since Johnson won the Conservative leadership contest on July 24, GBP has declined over 3.5% and the lowest since January 2017. Markets will focus this week on the Unemployment Rate for June (available tomorrow) and July’s Inflation Rate on Wednesday.

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