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US dollar trades without changes after a “risk off” environment in North America

By OFX

The US dollar traded flat in yesterday’s trading session, erasing initial losses right after the New York Fed President John Williams said that the US economy would stay strong in 2019 and inflation would tick up above 2 percent, meaning that the Fed should continue to raise interest rates gradually. However, it was an awful day for equity markets, with S&P down 500 -3.06 %, Dow Jones down -3.1%, and Nasdaq down -3.8% . What makes today awful is not just the losses, but the fact the market got what it thought it wanted, a Fed pause and a trade truce, and yet equities couldn't hold a rally.

Furthermore, after the nasty day in equity markets yesterday, it seems to be a reality that growth in the US will slow next year with the interest rate curve continuing its inversion. An inverted yield curve might mean a recession in the US; those expectations plunged the equities lower, and the US dollar erased initial losses.

The Bank of Canada (BoC) is meeting today and the market is expecting that it will remain on hold, however, it is likely that the announcement will leave the door open to further hikes. The BoC has been on a hiking path much like the Fed (BoC has hiked rates five times since May 2017), but if the market is right about US growth slowing, a BoC pause may be a theme in 2019, especially if oil prices fail to recover. Probably, the BoC will note that weaker commodity prices (i.e., crude) present a headwind to the outlook, but they might warn again higher interest rates being needed for the Canadian economy.

The USD/CAD increased 0.1 percent overnight, and it is trading at 1.3271 at this moment, after a risk-off day in the North American stock markets and despite that the US dollar did not go much higher.

However, what might help the Loonie over the next few days is the positioning of the market participants; US dollar longs are approaching a 1 1/2-year high and are due for a pullback, according to Bloomberg.

So it would appear that Emmanuel Macron the French President has decided to make a u-turn and suspend fuel tax rises that have led to violent protests across the country. It was Prime Minister Edouard Phillipe who announced the change in policy demonstrating the critical nuances of European presidential politics. Interestingly as well, this story spills over into the situation currently ongoing in Italy with regards to its budget.

The Eurogroup late last night who were meeting to discuss the Italian budget also highlighted that five other European countries are set to fall foul of the budget rules for 2019. By not raising revenue through fuel tax hikes, France it would appear may also struggle to bring its budget deficit in line. The EUR/USD pair is trading higher this morning at 1.1355.

The whole Brexit debate within the Houses of Parliament did not get off to an excellent start for Theresa May and her government. Yesterday the government suffered three defeats on a range of items including issuing the legal advice provided by the Attorney General. Likely, more importantly, they lost a final vote that will allow Parliament to wrestle control of the Brexit process should the Government lose the crucial election next Tuesday (which is highly expected). Interestingly the DUP which props up May’s minority government voted with the opposition (no surprise there).

Elsewhere Mark Carney defended his analysis and forecasts that were released last week. Carney explained that a range of scenarios was examined over the last few years and it was not just the worst-case scenario that was put forward.

All in all, it was not a good day for the Pound yesterday, but this morning the GBP/USD pair is trading higher at 1.2775, an increase of 0.5 percent, it looks more like a technical bounce waiting for more news coming on December 11th.

The Aussie dollar is struggling at present and follows the lead of Chinese and US equities as it fell off due to concerns over how much progress and agreement there was at the recent G20 summit between China and the US.

The GDP for Q3 hasn’t helped things either as it was a big miss coming in at 0.3 percent versus 0.6 percent as expected. The RBA as mentioned yesterday does not meet again until February which means any reprieve for the Aussie may not be imminent. Even the absurdly high inflation forecasts from the RBA will provide much hope.

The AUD/USD is trading lower this morning around the 0.7300 handle, a 0.57 percent decrease compared with yesterday’s close.

Finally, a positive result on the Global Dairy Trade auction for New Zealand as prices across the board rose 2.2 percent (although the price of cheddar dropped over 2 percent respectively which will be welcome news for many a cheese board in the run-up to Christmas). The Kiwi is still enjoying some of its recent gains and is a long way from the lows seen in October. This morning the NZD/USD pair is trading at 0.6924, slightly lower regarding yesterday’s close.