Dollar Bulls Retreat, Euro Gets All the Action

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Dollar Bulls Retreat, Euro Gets All the Action

Daily FX Market Roundup July 2, 2019

That was quick! After rising strongly on Monday, the U.S. dollar traded lower against all of the major currencies as G20 optimism gave way to fresh uncertainties. USD/JPY, U.S. stocks and Treasury yields turned lower after Russian President Putin unexpectedly pulled out of a scheduled event to meet with his defense minister minutes after U.S. Vice President Pence abruptly returned to D.C. Nothing has been revealed but there are reports that this could be related to a nuclear sub accident. With a whole gamut of options running through everyone’s heads, the first inclination was to sell but remember, the dollar was struggling to extend its post G20 gains before these headlines broke. The G20 Summit ended positively but investors are starting to realize that only time will tell if the trade truce can become a trade deal.

Meanwhile there was a lot of action in the euro today. The single currency shot higher after European policymakers said they are in no rush to lower interest rates. EUR/USD shot above 1.1320 on the back of the report but the knee jerk rally fizzled because data still calls for easing. German retail sales and EZ PPI fell for the third month in a row. The ECB may not be considering an immediate cut but don’t be mistaken more accommodation is still on the table. Towards the end of the NY session, the euro came under pressure after the European Union nominated IMF Director Christine Lagarde as Mario Draghi’s replacement. As the former finance minister of France and the current head of the IMF she has some experience but not as a central banker. She would also be the first politician to assume the role. The initial drop in the euro, as minor as it may be suggests that investors would have preferred a current member of the Governing Council like Bundesbank head Weidmann or France Governor Villeroy de Galhau who have a more intimate understanding of the current issues the central bank faces. Revisions to the PMI services and composite reports are scheduled for release tomorrow. Downward revisions could extend the slide for the currency.

All 3 of the commodity currencies traded higher today despite easing by the Reserve Bank of Australia. The RBA lowered interest rates for the second time this year by 25bp to a new record low of 1%. They left the door open to additional easing, which should have been negative for the currency but after falling initially, AUD/USD recovered within minutes because the central bank mentioned a few improvements in house prices, infrastructure spending and resources investment. The market has also been looking for a followup move in August so talk of additional easing was not a surprise. According to Lowe, the RBA is prepared to adjust rates again if needed to support growth and inflation. There’s no question that the RBA is the most dovish central bank out there so the path of least resistance for AUD should be lower. There are still a number of key Australian economic reports scheduled for release today including tonight’s services PMI and trade balance report. Given the softness of manufacturing and dovish RBA, the risk is to the downside, paving the way for further losses in A$.

Kathy Lien
Managing Director

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