Home Daily Commentaries The US dollar decreases after the European Union seems likely to retaliate on cars and auto parts tariffs

The US dollar decreases after the European Union seems likely to retaliate on cars and auto parts tariffs

Daily Currency Update

The US dollar index increased around 0.15 percent after the release of the “beige book” report from the Federal Reserve in yesterday’s trading session. The report compiles information from business contacts in each of the central bank’s 12 districts. This release showed waning optimism among U.S. businesses as they face the government shutdown, trade disputes, higher borrowing costs, and a volatile stock market. It is normal to see that the American economy continues to grow, but some firms are pulling back on planned investments for 2019, according to the Fed. On top of that, the Fed linked rising student debt to a drop in home ownership among young Americans. This, along with the flight of college graduates from rural areas, were two significant shifts that have helped reshape the U.S. economy.

In contrast, some US dollar pairs were trading at new highs, especially Emerging Market currencies such as the Thai Baht, South African Rand, Chilean Peso, and Mexican Pesos. Fed policy is the main reason for the pause in policy normalization.

Key Movers

The USD/CAD continues rising in slow motion without economic data from yesterday or today. The only driver of the Loonie these two days are the US dollar and the crude oil prices. The next significant economic data release will happen tomorrow where the consumer price index for December is expected to show 1.7 percent year to year, and the core CPI is expected to show 1.9 percent year to year.

The USD/CAD pair is rising strongly by 0.47 percent (weaker Loonie) this morning, which is testing an intraday high of 1.3319. This is amid an almost 2 percent decrease in crude oil WTI prices due to American crude oil production. During the week ending January 11th, this production was the highest national output in the world, and it was a record in the week according to the Energy Information Administration (EIA). Furthermore, the mood in the North American equity market is negative, which does not help the Loonie to appreciate. Today’s negative market sentiment is being driven by Morgan Stanley’s results and its miss of estimates in its earnings release.

Yesterday, the ECB's Villeroy and Nowotny both spoke in a relatively quiet day for European markets. Villeroy stated that any rate increases from the ECB would depend on economic development, while Nowotny talked about how there is no danger of a recession in the Eurozone. This is interesting because Germany could find itself on the brink of a downturn come February when its Q4 GDP numbers are released. Warning about recessions always suggests that there are some underlying concerns.

For the ECB and Mario Draghi himself, it would appear that they are in no rush to hike rates any time soon, but the ECB may have missed the boat entirely when it comes to normalizing rates. We may go through an entire economic cycle without any tightening from the ECB and Draghi at all.

The EUR/USD pair is trading sideways this morning between 1.1375 and 1.1425.

Prime Minister Theresa May and other members of the cabinet have been holding a series of meetings with MPs from across the political spectrum to try and break the Brexit deadlock. Senior MPs from the Democratic Unionist Party, Liberal Democrats, Plaid Cymru, and the Scottish National Party all met with May in the aftermath of her confidence vote victory on Wednesday evening. All day yesterday further talks were held with members of the Tory European Research Group, Senior members of the 1922 committee as well as several Labour MPs.

Labour Leader Jeremy Corbyn was noticeably absent from the meetings. He is refusing to meet the Prime Minister face-to-face until he gets a guarantee that a “no-deal” Brexit will be ruled out. The Prime Minister naturally cannot openly promote this to Corbyn as it will remove some of her negotiating leverage with the EU. May is set to present an amended proposal to the Commons on Monday with a vote due on January 29.

The GBP/USD pair made a play for the 1.3000 handle yesterday for the first time since early November, however, it has since fallen away towards 1.2926 in the European’s trading session.

The AUD/USD pair is trading flat at 0.7193 this morning. Despite the markets finishing the week risk-on, the Aussie is trading slightly under the 0.7200 handle against the Greenback with no firm positive developments over the US/China trade dispute. Next week’s employment figures from Australia provide the next big domestic event of note.

The Kiwi dollar is trading 0.10 percent higher at 0.6768 after slipping back in the European trading session. There is no top tier data from New Zealand next week so direction for the local buck and much of the rest of the world will be taken from the China Q4 GDP number due late Sunday night.

Expected Ranges

  • USD/CAD: 1.3271 - 1.3337 ▲
  • EUR/USD: 1.1347 - 1.1400 ▼
  • GBP/USD: 1.2920 - 1.2850 ▼
  • AUD/USD: 0.7150 - 0.7216 ▼
  • NZD/USD: 0.6720 - 0.6800 ▼