The Canadian dollar rose slightly by 0.06 percent as trade concerns eased, but not enough to change the narrative. The US is still on the offensive with a new round of tariffs in effect and working on a list of $300 billion in Chinese imports subject to tariffs. Without walking back those comments the Trump administration showed willingness to sit down and negotiate as even if they claim they would win a trade war, they would prefer a good deal with China. Stocks rebounded after the less combative statements and risk appetite for equities was higher.
In the currency world the US dollar gained ground against safe havens like the Japanese yen and the Swiss franc. The British pound continues to lack traction awaiting any progress on Brexit proposals.
The EUR depreciated after a disappointing German ZEW report that turned negative as investor sentiment are pessimistic on the economy in the next six months. German GDP data tomorrow could further validate the outlook if it comes under the 0.4 percent forecast.
Canadian inflation will be the highlight of Wednesday’s economic calendar for CAD traders. A massive job gain in April could find it hard to translate into higher wages, so inflation is expected to remain stable. If the US decides to engage in a trade war with China two scenarios become clear.
A North American block, strengthening the USMCA to better integrate the economies of the US, Mexico and Canada in order to avoid inflationary pressures due to higher imports and a growth slowdown. The opposite scenarios would be to open up more trade war fronts and not ratify the USMCA taking the same combative stance against Canada which could put the loonie under pressure as the economy depends on trade with the US.
OIL – Oil Higher After Drone Attacks Reduce Saudi Arabia’s Output
Oil prices rose after Saudi Arabia reported a drone attack on one of its pipelines on Tuesday. Supply disruptions have kept crude higher, even as the US has ramped up production. The OPEC+ agreement to limit output is the biggest factor, but geopolitical disruptions like the US sanctions against Iran and Venezuela and the armed conflict in Libya are added to the situation in Saudi Arabia.
Saudi Arabia is seen as the main producer that could cover the gap in supply left by Iranian crude. US President Donald Trump has tweeted about the OPEC’s role in keeping prices lower if they increase their output.
The deal between OPEC and other major producers will reach its end in June, but it could be extended if participants deem the market has not reach price stability which was their main goal. Russia remains a big question mark as it has sacrificed its revenue to be part of the deal and could be ready to take advantage of higher prices ahead of even higher levels of US production causing another drop.
US production has increased dramatically to the point that the one-time net importer is now an exporter of energy products. Shale technology has tipped the scales of global production and threatens to reduce the influence that the OPEC has on the market. The decision from OPEC members to fight fire with fire and flood the market to drive shale operations into bankruptcy backfired and forced the group to reach out to non-OPEC members in order to have a significant impact on the market by collectively reducing their output.
GOLD – Gold Loses Safe Haven Appeal as Trade Concerns Ease
Gold lost 0.31 percent on Tuesday after China and the US both issued less aggressive comments hinting at a new round of talks. Trade war concerns eased and with them the support for the yellow metal as a safe haven.
Gold will remain in the conversation as geopolitical risks remain with the ongoing trade negotiations as well as Brexit and the upcoming Australian elections.
A trade deal with China was thought to be in the final stages, but last week the US suddenly announced China had backtracked on previous commitments and set a Friday deadline for tariffs to rise to 25 percent and a new proposal on $300 billion of Chinese imports.
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