The Canadian dollar rose 0.28 percent on Monday against the US dollar. The greenback is still on the backfoot after the Fed took out the patient language from its FOMC and today President Trump criticized the missed opportunity of not cutting rates in June. The market is pricing in a July rate cut by the Fed. The rate divergence between Canadian and American rates could be narrower as the probability of a 50 basis points in the Fed funds benchmark is over 40 percent.
Economic indicators would validate the Bank of Canada (BoC) staying in the sidelines at the current 1.75 percent interest rate, specially if the G20 meeting between Trump and Xi at least manages not to escalate their tariff dispute.
The USMCA was a headache for the loonie last year, but the trade deal that replaces NAFTA is on its way to ratification after Mexican senate voted in an overwhelming majority for the deal. Canada and the US have begun their own ratification process, where some obstacles remain, but are expected to be surmounted if it can be implemented before the 2020 elections.
The US dollar is lower across the board against major pairs. Trade optimism ahead of the meeting between Presidents Trump and Xi as they both take part in the G20 in Japan later this week has put the dollar in the back foot. The greenback has lacked traction since the Fed dropped heavy hints that it’s ready to start a monetary policy easing cycle as soon as July.
US President Trump went on twitter to criticize the Fed for not cutting in June, putting further downward pressure on the dollar. Donald Trump has been very vocal on the Fed standing on the way of economic growth and higher stock returns, but the central bank will continue e to react to indicators and if there is an improvement it could keep the benchmark rate unchanged.
Trump had a busy day as his comments also caused healthcare stocks to fall as he signed an executive order to improve and increase transparency in pricing after saying unfair pricing has made companies richer.
OIL – Oil Lower as OPEC+ and G20 Uncertainty Hit Demand Expectations
Oil dropped on Monday despite the US announcing new sanctions against Iran. The meeting between the leaders of China and the US as a sidebar of the G20 will be key for oil prices, with lots of questions likely to remain unanswered. There is a small probability of a deal being announced after the two sides were close to deal only to escalate tariffs. The two sides remain far apart and there needs to be more details in where they stand for the market to truly grasp how big the gap is.
Supply disruptions have added stability, in particular the production cut agreement by the OPEC+, but as doubts rise on what the fate of the G20 meetings will have on global growth and energy demand, the deal could not get an extension. It makes sense for major producers, Russia being the most vocal, to delay their decision until they get a sense which way the US-China trade war will unfold.
Dollar weakness and more reports about supply disruptions due to geopolitics should bring crude prices higher, with the main obstacle being an unfruitful meeting by Trump and Xi.
GOLD – Yellow Metal Retakes Safe Haven Crown
Gold rose 1.64 percent on Monday. The yellow metal is trading at $1,419 as investors reacted to the US announcing new sanctions against Iran. According to Treasury Secretary Mnuchin the sanctions were in the works even before the attack on the two tankers in the Gulf of Oman.
Gold touched a six year high as the appeal of the metal as a safe haven rose, even though the US has played down an armed response and will stick to financial sanctions.
Trade optimism had taken some of the momentum off gold prices ahead of the G20, but the tension in the Middle East has boosted prices.
The dollar continues to trade weaker after the Fed has signalled that an interest rate cut is coming, benefiting gold.
The main event this week will be the sidebar meeting between Trump and Xi, which could stop the current gold rally with a productive sit down that ends up in a trade agreement. The flip side could boost gold prices even further as the Trump administration has shown that it could turn from friendly to aggressive in a heartbeat further fuelling investor’s demand for a safe haven.
STOCKS – Equities Mixed as Trump Target Healthcare Ahead of Trump-Xi Meeting
Equities were mixed at the start of the week as new Iran sanctions were announced and the White House put pressure on healthcare stocks by issuing an executive order to look into pricing in the sector. The G20 will not get going until mid-week, but the anticipation of a meeting between the leaders of China and the US is keeping markets guessing.
The prolonged trade war between the two largest economies has downgraded global growth as more barriers to trade means higher prices. Optimism remains high, but more details need to emerge before the market can fully price in how far apart the two sides really are from a deal.
The Fed has signalled it will stay out of the way of the market, by going the full 180 degree turn and after hiking four times in 2018, it now appears ready to issue a rate cut as per the latest FOMC meeting. July has become a prime candidate with the Fed futures market pricing almost a 100 percent probability of a cut, and the debate is now entered on how deep it could be, with 57 percent probability of a 25 basis points and a 42.6 percent of a 50 basis points to leave the target rate in a 175-200 basis points range.