Dollar index firms as risk assets dive after new tariff threats

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OVERNIGHT MARKET SUMMARY

The U.S. dollar index rose within familiar ranges overnight, thanks in large part to its solid gains against its riskier and higher yielding rivals. News overnight that President Trump’s trade team was considering another 10% tariff on $200 billion worth of Chinese imports put the brakes on this week’s rally in risk assets and sent trade-sensitive currencies from Australia, New Zealand, Canada, Mexico and South Africa sharply lower. The escalation in the U.S.-China trade war after the implementation of $34 billion in tariffs by both Washington and Beijing last week cast a shadow over global markets that had enjoyed a much more upbeat mood so far this week.

The British pound was steady again overnight after tumbling on news earlier this week that both the U.K.’s Brexit Minister and Foreign Secretary resigned in protest over Prime Minister Theresa May’s plans to peruse a close trading pact with the EU after the Brexit. While the high profile cabinet departures were a blow to May’s attempts to project a more unified Tory Party, it looks unlikely that a possible no-confidence vote challenging her leadership would win the 159 votes needed. Investors continue to weigh the Brexit uncertainty along with the increasing political risk against increasing odds for an August rate hike by the BOE. BOE Governor Mark Carney’s speech later today will be closely watched for any clues on the timing of the bank’s next move on rates.

The euro, which had been pressured by the increasing uncertainty around global trade overnight, jumped to session highs after Reuters, citing unnamed ECB officials, reported that policymakers were divided over the timing of the bank’s first hike. While some officials saw a likely move coming in the autumn of 2019, others thought a rate increase as early as July would be prudent. The more hawkish rate timeline sent the single currency broadly higher ahead of a speech later in the session by ECB President Draghi.

The Canadian dollar hovered near a one-week low against the greenback ahead of an expected quarter-point interest rate increase by the BOC later this morning. While a hike in Canadian lending rates would normally support the CAD, the potential for a dovish statement that warns of possible risks to the economy from an increasingly uncertainty global trade backdrop, could limit any gains for the Loonie.

USD: The dollar put in a mixed performance overnight giving up its earlier gains against its major trading partners like the euro and the British pound but firming against its higher yielding and riskier rivals from emerging markets, from commodity producing nations and from economies that are highly reliant on global trade. News overnight that the Trump Administration is considering another 10% tariff on $200 billion worth of Chinese imports was a significant escalation that will all but certainly result in a retaliation of a similar magnitude by China. The escalation in the trade war between the world’s largest economies remains a key focus for global investors and a headwind for riskier assets. In the world of foreign exchange, this has so far, most clearly played out as a broadly negative development for currencies like the Aussie, the New Zealand dollar, the South African rand, the Mexican peso and the Canadian dollar. Data this morning showing a hotter than expected rise in both headline and core PPI had little impact on the greenback.

GBP: Sterling held steady overnight after tumbling earlier this week on news that Foreign Secretary, Boris Johnson and Brexit Minister, David Davis both resigned in protest over Prime Minister Theresa May’s plan to peruse a close trading relationship with the EU after the Brexit. The high level cabinet departures were a major blow to Mrs. May’s attempts to project a more unified government, but ultimately may not represent the threat to her leadership that many had originally feared. For now, it looks unlikely that more hardline Brexiteers will be able to win the 159 votes needed to oust May. Investors will look to comments from BOE Governor Mark Carney later in the session for direction.

EUR: The euro jumped to session highs after Reuters reported that ECB policymakers were divided over the timing of an interest rate hike next year. Sources told Reuters that while some policymakers saw waiting until the fall of 2019 as prudent, others thought a hike in rates as early as July would be warranted. Investors had previously interpreted the ECB’s last statement, which called for rates to remain at current levels “through the summer of 2019”, as meaning rates would likely not rise until September at the earliest. The move higher in EUR/USD could set up a test of key technical levels for the pair, meaning further near-term gains for the single currency could be possible.

CAD: The Loonie was near a one-week low ahead of this morning’s Bank of Canada monetary policy announcement that is likely to result in the year’s first quarter-point hike in Canadian lending rates. The loonie’s slightly heavier tone comes as a result of increasing worries about global trade and protectionism, heavier commodity prices and the risk that a BOC hike today could be accompanied by a more dovish outlook for rates in the second half of this year.

DOLLAR OVERNIGHT PERFORMANCE VERSUS
EUR
+0.05%
CAD
+0.21%
MXN
+0.08%
CNY
+0.63%
CHF
-0.08%
DKK
-0.05%
AUD
+0.75%
EUR/CAD
+0.27%
GBP
+0.08%
SEK
+0.09%
NZD
+0.64%
EUR/GBP
+0.15%
JPY
+0.15%
NOK
+0.20%
ZAR
+0.81%
EUR/JPY
+0.20%
MARKETS AND COMMODITIES PERFORMANCE
DOW JONES

%
CRB INDEX

%
FTSE 100
2865.55
-1.45%
US 10 YEAR
2.851
-0.005%
GOLD
1250.82
-4.41%
CRUDE OIL
73.27
-0.84%

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