The Canadian dollar slipped 0.12 percent on Tuesday after the market tried to scale back probabilities of multiple rate cuts in 2019 by the U.S. Federal Reserve. Trade war concerns also rose as the precedent of a quick win in the trade war with Mexico could see the U.S. use the tool more this year. The USMCA ratification process is due to start and is not exempt from revisions based on political agendas.
Uncertainty about what the outcome of the U.S.-China trade dispute will be ahead of a potential meeting in Japan at the end of the month are giving the greenback a boost as its appeal as a safe haven rises.
The U.S. dollar was mixed against major pairs. The EUR and the GBP were higher against the greenback after President Donald Trump tweeted yesterday morning about the unfair strength of the U.S. dollar. Rising probabilities of an interest rate cut by the Fed are keeping the dollar under pressure, but given the appeal of the currency as a safe haven during the U.S.-China trade war, it continues to appreciate despite the wishes of the Trump administration.
The market is pricing in multiple rate cuts before the end of the year, but before that happens the case for a weaker U.S. economy has to present itself before the Fed. Inflation data to be released on Wednesday could validate the downward trend started with the disappointing jobs report last week. Core inflation is expected to gain 0.2 percent and the headline indicator only 0.1 percent. Wage growth was also a miss on Friday with a 0.2 percent gain when the forecast called for 0.3 percent.
The Fed will wait for a confirmation of U.S. slowdown before it acts. The U.S. central bank is not known for being pro-active and will not fix the economy, until there is proof that is broken. A rate cut in the summer will materialize if there is proof of a slowdown but could also re-adopt a patient stance if there is a trade agreement between the U.S. and China. The flip side is that failing to discuss trade or a rise in aggressive rhetoric from either side could increase the trade headwinds against the U.S. economy and force Chair Jerome Powell to cut sooner rather than later.
Crude Flat as Strong Dollar Offsets OPEC+ Extension Rumours
Oil was flat on Tuesday as the U.S. dollar rebound continues for its second day putting pressure on energy prices. The dollar was higher after the deal with Mexico on immigration avoided tariffs and closed off a trade front so that now the U.S. can focus on the U.S.-China trade dispute.
The negotiations between the two super-powers don’t have a set date, and with the G20 in Japan fast approaching, the chance of is a positive announcement is uncertain. The impact on oil prices from further downgrades in global growth could lead to further losses.
Russia is playing hard to get and remains non-committal about extending the OPEC+ deal to cut oil production. The deal has been the major stabilizing force for crude prices, but rising U.S. production and a prolonged trade war are close to offsetting the balance. Russia could be improving their position to seek leverage out of Saudi Arabia before agreeing to rejoin the major producers.
Yellow Metal Recovers as Trade Tensions Rise Safe Haven Appeal
Gold rose 0.1 percent on Tuesday after falling more than 1 percent at the start of the week as the short-lived U.S.-Mexico tariff dispute once again put emphasis on the U.S.-China trade war. The U.S. dollar rebounded despite mixed economic indicators putting investors on alert of possible rate cuts from the Fed.
Equities were the main beneficiaries Monday but as equities failed to gain momentum, the yellow metal was once again seen as a destination in times of uncertainty. If there is no sit-down between U.S. and Chinese leaders at the G20, the yellow metal will rise as investors will be on the lookout for a safe haven.
The U.S. Federal Reserve is expected to announce at least one interest rate cut in 2019, putting less pressure on the metal as recession fears increase. Physical demand for gold continues at a healthy pace and the asset’s appeal as a safe haven will depend on negotiations between the U.S. and China at the G20.
Markets End Six Day Win Streak Await U.S. Inflation for clues on Fed’s Move
Equities in the U.S. ended lower after the massive rebound on Monday. June has seen the stock rally narrative reborn and with the U.S.-China in the background this month, and the Mexican import dispute being so short-lived it all fed into the expectations of higher levels if trade headwinds remain subdued. As the potential G20 meeting between Trump and Xi gets closer, the anxiety in the market will be reflected in equity prices and is up to the Trump administration to manage those expectations better than in the past.
A trade deal in June is a long shot, seeing how far apart the two sides are, but signs of progress would spark optimism that a deal is once again within sight which could prompt equities to jump into a higher gear.
Pound Rises on Solid Jobs and Inflation Data
The British pound became the biggest major pair winner against the U.S. dollar on Tuesday. The pound appreciated 0.30 percent after the release of the UK’s jobs report. The jobs data showed a 3.3 yearly rise in wages and the lowest unemployment rate since 1974. The shadow of Brexit was felt even in the light of positive data as the number of jobs added was the weakest since August with employers holding back on hiring as the divorce between the United Kingdom and the European Union could be entering its endgame.
The rise in wages in particular is seen as the right inflationary data feeding into the expectations that the Bank of England (BoE) could lift the interest rate to avoid the economy overheating despite Brexit headwinds. Comments on Monday from Michael Saunders delinked any future action from the central bank to the Brexit outcome. The divergence between the BoE who could potentially raise rates in 2019, compared to the Fed and the ECB that have a rate cut as their next possible monetary policy move has put a bid on the GBP.
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