Home Daily Commentaries The market sentiment towards the US dollar is changing following the trade truce

The market sentiment towards the US dollar is changing following the trade truce

Daily Currency Update

The US dollar decreases 0.5 percent this morning following the US-China trade truce; the risk in the global markets is lower than it was in November and October. The cessation of escalating trade tension, and the conciliatory tone around the deal suggest both sides wanted to avoid the consequences of no deal. This is changing the sentiment towards the US dollar.

Also, the robust US ISM manufacturing showing a 59.3 versus 57.5 read did not help the US dollar, probably because Powel’s dovish comments last week are still fresh on everybody’s minds. Furthermore, this trade deal saw the US treasury curve flatten, and the market put back only 2 basis points of Fed hikes for next year.

Key Movers

The Loonie is stronger this morning for the second day running - the USD/CAD was trading at 1.3170 from 1.3200 yesterday. The cessation of escalating trade tension and a rebound in crude have prompted a recovery for the Canadian Dollar against the Greenback.

The Bank of Canada is meeting this Wednesday to discuss their interest rate levels. The BoC is expected to maintain the benchmark rate at 1.75 percent and hike it in early 2019. Also, OPEC is meeting in Vienna this Thursday. Both interesting events that could shift the Loonie in either direction.

Earlier this morning, labor productivity was published at 0.3 percent for the third quarter, lower than the forecast at 0.4 percent. The USD/CAD pair was touching 11-day lows this morning, but how far can the optimism go after the BoC announcement tomorrow? Canada’s current account deficit is narrowing in the third quarter off the back of improvement in the goods and services trade deficits. However, on the negative side, the net direct investment deficit widened sharply. Post-USMCA investor optimism could emerge, but the data will tell.

Europe strikes a tough bargain, not only with regard to Brexit, but also the Italian budget. The latest news and reports show that the European Commission has convinced Italy to limit it's budget deficit to around 1.9 percent, a far cry from the 2.5 percent initially touted by Deputy PM Salvini. The chaos facing French President Emmanuel Macron has not spilled over into the markets yet, while the EUR/USD struggles to break through the 1.1400 handle.

It is ‘out of the frying pan and into the Brexit fire’ at the moment for the government, although this time it seems somewhat self-inflicted. Yesterday, Speaker of the House John Bercow said there was an ‘arguable case’ that the government was in contempt, following its decision not to release the full legal advice on Theresa May’s Brexit plan. The motive behind May and Attorney General Cox’s decision is uncertain at the moment, but the long and short of it is that Cox, and perhaps even David Lidington, could be suspended at a time when the Prime Minister needs as many supporters (and votes) as possible.

Elsewhere, despite the strong growth that the UK saw in the third quarter, it struggled in October and as we moved into the fourth quarter. Yesterday’s manufacturing data was a welcome pick up however, with the readings beating expectations - new orders in particular were impressive. The Pound's key date of significance though is of course December 11th. The GBP/USD is trading at 1.2775, up 0.43 percent.

The Reserve Bank of Australia's (RBA's) final decision of the year came and went like all the rest, with the RBA leaving it's cash rates unchanged at 1.5 percent. The effect on the Aussie dollar was minimal. The next RBA meeting isn’t until February, and it is unlikely that there will be any change then either.

The recovery of the Kiwi is still on track. The NZD/USD pair is still increasing, and it tested a new high intraday of 0.6970 this morning. The latest global dairy trade auction is on the cards today, but the primary driver for the Kiwi will remain the US/China trade war for the time being. Other currencies, from emerging markets to the Chinese Yuan, are receiving many upgrades from investment banks, right after the tariff de-escalation between the US and China.

Expected Ranges

  • USD/CAD: 1.3150 - 1.3217 ▼
  • EUR/USD: 1.1360 - 1.1423 ▲
  • GBP/USD: 1.2729 - 1.2850 ▲
  • AUD/USD: 0.7350 - 0.7393 ▲
  • NZD/USD: 0.6900 - 0.6960 ▲