Trump Bends On Trade, Dollar Hits 3-Week Lows

By Kathy Lien, Managing Director of FX Strategy for BK Asset Management.

The biggest story in the markets Monday was President Trump’s trade deal with Mexico. The hit a record high on the news and the rally lifted all of the major currencies. Investors are hoping that Mexico’s deal represents a more conciliatory approach by Trump that could pave the way for similar agreements with other countries. Rising global trade tensions has been one of the greatest sources of uncertainty for the financial markets this year and it sparked a risk-off tone that drove the to a 15-year high. Now that Mexico secured a bilateral trade deal, investors are unwinding their long dollar trades in the hopes that more countries will follow. The Dollar Index dropped to 3-week lows on Monday and further losses are likely. With no major U.S. economic reports scheduled for release this week, headlines like these will be the primary driver of market flows. Tuesday’s and reports should have limited impact on the greenback.

Canada didn’t miss a beat. As soon as President Trump said he was ready to start negotiations with Canada, Foreign Minister Chrystia Freeland immediately cut her trip to Europe short and booked a flight for Washington on Tuesday. While Canada said they would only accept a deal that was good for the country, they are eager to reach an agreement after President Trump said he would end NAFTA. If Canada manages to secure a preliminary trade agreement this week, all of the major currencies will extend higher and the will retreat further. Investors will immediately turn their hopes to China as Trump said he hopes that they can eventually work out a deal. But if U.S. and Canada can’t agree or there’s no meaningful progress this week and the President reverts back to threatening Canada with auto tariffs not only would the fall quickly and aggressively but all of the major currencies could give up their gains as investors return to the greenback. Technically, USD/CAD appears to be headed for 1.29. The has more room to rise with a move below 18.50 likely.

Monday’s best-performing currency was the . Not only did it benefit from the overall improvement in risk appetite but it was also supported by stronger business confidence. The German rose for the first time in 9 months. Expectations for exports were particularly strong, which is a sign that concerns about trade tensions are easing. This means that more than short covering could fuel the rally in EUR/USD going forward. Italian bond yields also stabilized and for all of these reasons, we see EUR/USD extending its gains to 1.1750. The 7 percent decline in EUR/USD is also incredibly stimulative for the economy so data going forward could be steady.

For the first time in more than a month, ended the day above its 20-day simple moving average, which tells us that sterling could experience a stronger recovery. Brexit talks are happening continuously so at any point, we could get some positive headlines. As we are in the last week of summer, there are no major UK economic reports scheduled for release and this means GBP/USD will take its cue from the . On a technical basis, the pair appears poised for a rally to 1.3050.

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