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The US dollar bounces as we await more details from the trade talks with China

By OFX

The US dollar index is bouncing from oversold levels after another day of positive risk sentiment. US Commerce Secretary Wilbur Ross said on CNBC that there is an excellent chance of a deal. The stakes are higher now because of slowing economies and volatile financial markets on both sides.

On the release side, the December ISM non-manufacturing came in at 57.6, versus 58.5. This was lower than expected, which confirms the new Fed’s policy of “wait and see.” Even Fed Bostic said the list of potential problems includes the partial shutdown of the U.S. government, which has left hundreds of thousands of federal employees without a paycheck. He also said that he prefers only one rate hike this year - he is not a voter this year, but his dovish comments pushed US equities to new highs for the day. Additionally, Trump announced he would address the nation tomorrow night (9 PM EST) on the border crisis, which did take some of the excitement off equities and left a floor in the US dollar.

The US dollar index is bouncing 0.25 percent this morning after US officials held the second day of trade talks with Chinese counterparts in Beijing. Neither side has provided any details about the negotiations. These negotiations aim to hammer out details on some pledges such as: more Chinese purchases of U.S. goods and services; increased American access to China’s markets; better protection of U.S. intellectual property; and, reductions in Beijing’s subsidies to Chinese companies.

The Loonie had another rally in yesterday’s session, but the rally is starting to look exhausted. The USD/CAD touched intraday lows of 1.3268 twice, representing a 0.68 percent decline. This was due to the weakness of the US dollar index and the recent strength of the price of crude.

On the release side, the Ivey Purchasing Managers Index for December came in at 59.7, while the previous month printed at 57.2. This improved number also helped with the Loonie’s bullish mood. The Ivey Purchasing Managers Index is a leading indicator of economic health and holds perhaps the most current and relevant insight into the company's view of the economy.

Tomorrow, January 9th, the Bank of Canada is expected to keep its key interest rate at 1.75 percent. Additionally, the monetary policy report will probably show cuts in growth estimates after the decline in oil prices since October 2018, which also provides some headwinds on inflation.

Concerns about US-Canadian trade relations, plus a more dovish sounding US Fed chairman in the last few days, have heightened odds for an “unchanged” rate in the BoC’s first announcement of 2019. However, any surprise will make the Loonie very volatile.

Fears are building over the health of the German economy as the latest Factory Orders month to month fell short of target printing. The German economy has been severely affected over recent months on the back of Trump's trade offensive with China, and its knock-on effect with the rest of the world. Third quarter growth fell into negative territory with -0.2 percent shown for the July to September period, and Germanys DAX stock exchange has fallen around 20 percent over the past 12 months. Holders of the Euro will be hoping that an agreement can be found between the two superpowers, or we could see the Euro Zone’s largest economy slip into recession for the first time since 2009. Thursday sees the release of the minutes from the European Central Banks last interest rate decision. Discussions over the timing of a rate hike will be the main area of focus. EUR/USD started to fall this morning 0.42 percent after touching yesterday intraday highs of 1.1485; it is currently sitting at 1.1427.

Tomorrow sees the start date of debate in the House of Commons on UK PM Theresa May's proposed Brexit withdrawal agreement, ahead of next Tuesday's parliamentary vote on whether to accept it or not. With MPs returning to work yesterday after the Christmas recess, there has been a flurry of news on the matter, including Arch-Brexiteer, Boris Johnson calling on MPs to vote down May’s plan; the government carrying out tests on what a no deal Brexit could mean for traffic at Dover; and, Brexit Secretary, Stephen Barclay, denying reports that leaving the EU could be postponed; etc. It’s looking likely that May’s plan will get voted down at the first attempt on Tuesday without some further assurances from the EU emerging regarding the Irish backstop. Expect sterling volatility to return over the coming days after a relatively calm Christmas period. The GBP/USD is falling 0.32 percent this morning; it is currently sitting at 1.2731.

With little news emanating from Beijing over the trade talks between US and Chinese officials, the proxy for the subject matter, the Aussie dollar, is weakening this morning. It has decreased 0.25 percent so far. AUD/USD had been relatively calm yesterday, recovering from last week’s Yen driven flash crash.

Positive news regarding progress on the talks will push the Aussie dollar higher. We should hopefully get some news today with negotiations scheduled to wrap up later this morning. Last night saw Australian trade balance numbers fall short with an AUD$1.93B surplus seen for November. Tonight, we have Building Approvals month to month with another contraction in the sector eyed. AUD/USD is trading at 0.7128 this morning.

Like the Aussie, the Kiwi is weakening against the US dollar with markets awaiting news on the China/US trade talks. There is no data of note from New Zealand this week, so external factors will be the primary driver of the Kiwi. NZD/USD is currently at 0.6716, a decrease of 0.57 percent.