FX Flows Fueled by G20 Optimism
Daily FX Market Roundup June 28, 2019
All of the major currencies either held onto or extended their gains on Friday on trade talk optimism. President Trump’s sit down with President Xi is on Saturday and contrary to our expectations for profit taking, the bulls have held onto their positions with the hope of a positive resolution. The general belief is that it won’t take much for Trump to agree to delay further tariffs on China and by the same token it doesn’t take much to satisfy the market. As long as the meeting does not result in trade tensions escalating further, we could see a relief rally in currencies. We expect President Trump and President Xi to agree to restart trade talks but given Trump’s general unpredictability, even if tariffs are delayed, they remain an ongoing threat to Chinese and global growth. However a trade truce is not the same as a trade deal and the chance of a full fledged trade agreement between the U.S. and China is slim. So unless we are wrong and Trump announces a reduction or elimination of tariffs over the weekend, the corresponding rally in the US dollar and improvement in risk appetite will be short-lived. USD/JPY, AUD/USD and other major currencies could receive a lift from a delay in tariffs but the outlook remains unchanged because delaying additional tariffs is not the same as lowering or removing them. If President Xi and President Trump clash at the meeting and walk away with no meaningful progress, we are in big trouble because USD/JPY, AUD/USD and other major currencies could crash lower.
The US dollar rebounded against most of the major currencies last week with the New Zealand and Australian dollars leading the gains. This price action is consistent with trade talk optimism, which means the near term sustainability of their gains in the coming week hinges on whether investors are satisfied with the outcome of G20. AUD/USD rose 8 out of the last 9 trading days but the move in NZD/USD was even stronger with the pair hitting a 3 month high after rising for 9 straight days. The Reserve Bank of Australia cut interest rates in May and is widely expected to lower rates again this week. However judging from the price action of AUD/USD, the market does not expect any additional moves.
Meanwhile USD/CAD dropped to its weakest level since October. There are countless reasons why the loonie is so strong from risk appetite to US dollar weakness, trade talk optimism, rising oil prices and the general robustness of Canada’s economy. GDP growth beat expectations while wholesale sales rose strongly. Canada can’t be immune to slower global growth forever. This will be a busy week for Canada with trade, employment and IVEY PMI numbers scheduled for release. If any one of these reports surprise to the downside in a meaningful way, we could see a nasty short squeeze in USD/CAD.