The U.S. dollar traded lower against all of the major currencies on Wednesday as Treasury yields resumed their slide. The New Zealand benefitted the most from the decline, rising to its strongest level in 3 months. Sterling, which had fallen to a year-to-date low versus the greenback during the European session recovered steadily into the NY close ending the day in positive territory. Housing starts and building permits dropped more than expected but the sell-off in the dollar really didn’t begin until the NY equity market open. Stocks started to fall and along followed the U.S. dollar. The Federal Reserve’s Beige Book didn’t hurt as the Fed districts reported a modest expansion with little change from the previous month. Most of their assessments were positive – they said manufacturing was flat but a few districts reported a modest pickup. Employment growth slowed slightly but their outlook is positive and they expect continued modest growth ahead. The problem is the widespread concern created by trade uncertainty. This outlook is consistent with the central bank’s broader views and did not have a meaningful impact on the greenback. Instead, the dollar took its cues from yields and stocks, which should remain the case for the rest of the week. Thursday’s Philadelphia Fed survey should be stronger given the uptick in manufacturing activity in the NY region.
There hasn’t been any meaningful progress in U.S.-China trade talks and President Trump isn’t pleased. On Tuesday he said there’s a long way to go on trade talks before an agreement can be reached and if China isn’t serious, he could unfreeze the final round of tariffs. While China wants the tariffs rolled back, it is not clear how far they will bend for this to happen. Their Commerce Minister was added to the negotiating team last week and many see an agreement more difficult with his hard-line stance. According to Commerce Minister Zhong Shang, “The US has started this economic and trade dispute with us in violation of the principles of the World Trade Organisation – a classic example of unilateralism and protectionism. We must make the best of the spirit of struggle, and stand firm in defending the interests of our country and the people, as well as the multilateral trading system.”
AUD and NZD took the news in stride with the latter rising to its strongest level in 3 months but if it becomes more apparent that trade talks turn sour, both currencies could suffer. In the meantime, NZD is outperforming its neighbor thanks to better-than-expected inflation data and higher dairy prices. Australian labor-market numbers were scheduled for release Wednesday night – there’s a good chance that job growth slowed because according to the PMIs, employment growth in the manufacturing and service sectors slowed in June. AUD/USD is at the cusp of a turn and weak labor-market numbers could take it down to .6950 easily.
The Canadian dollar continues to rise despite benign data. Although consumer prices declined less than expected in June, the -0.2% decrease was still the first drop in inflation this year. It drove the year-over-year rate down to 2% from 2.4% and the details of the report showed a decline in prices and internet services. Lower inflation is one of the main reasons why the central bank turned dovish this month but none of that seems to matter to the Canadian dollar. With oil oil prices falling for the fifth day in a row, it should only be a matter of time before USD/CAD bottoms as it is currently only being pressured lowered by the U.S. dollar.
Euro rebounded on the back of stronger inflation data but UK data was mixed. Inflationary pressures stagnated in June, leaving the year-over-year rate unchanged at 2%. As noted by our colleague Boris Schlossberg, “overall inflation readings in UK remain steady providing no impetus for BoE to move either way. For now, the focus in cable remains squarely on politics, but after all the harsh rhetoric from Torries regarding a hard Brexit, the markets appear to have settled down with traders now looking to see the next moves from London and Brussels once the leadership transition in both places is completed.”
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