The Canadian dollar is higher against the US dollar on Wednesday. The loonie rose slightly 0.38 percent versus the greenback with the price of oil also rising more than 2 percent. The gold rally hit a speed bump with the yellow metal losing 0.41 percent as investors take profit on the current run and appetite for safe havens subsides.
The Canadian currency traded h higher as Treasury Secretary stoked trade optimism by saying the deal is 90 percent done. There is still little details on what that actually means, and last time the market heard similar claims it was before a falling out that lead to tariff escalation from the US and China. Even if there is no major deal announcement the worst case scenarios are benign with a new round of talks the most likely outcome of the meeting as a sidebar of both leaders attending the G20 in Japan.
The Fed walked back market expectations of a 50 basis points cut with major dove Fed president Bullard suggesting a 25 basis points reduction would be more appropriate. The fact remains that the Fed could cut in the short term and that is boosting the loonie versus the greenback as economic data in Canada validate the Bank of Canada (BoC) staying on the sidelines by holding the benchmark rate at 1.75 percent and not follow other major central banks down the easing path just now.
OIL – Crude Higher After Monster Drawdown
Oil prices rose on Wednesday after the release of the Energy Information Administration (EIA) weekly inventories report. The higher than expected drawdown boosted crude prices with West Texas Intermediate rose 2.4 percent and Brent 1.89 percent.
Stronger demand in the US cause a 12.8 million drop in inventories destroying the 2.5 million forecast. US production has been rising, but at the moment the OPEC+ cut agreement, US Philadelphia Energy Solutions shutdown and geopolitical situations leading to sanctions against Iran and Venezuela are keeping supply levels low.
Supply disruptions have added price 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.
Supply disruptions and lower inventories would push crude prices higher as Middle East tensions remain high, and with trade optimism at a level where at least trade relations could not get worse after a Trump-Xi meeting.
GOLD – Gold Rally Stops as Investors Take Profit Eye G20
Gold dropped 0.42 percent but given the strong safe haven rally, the yellow metal is still trading above $1,409.42
Middle Eastern tensions will continue to remain high as Iran and the US do not seem ready to back down and have in fact escalated their verbal attacks. The G20 is looking to be a disappointment to investors looking for a blockbuster trade deal to be announced and is now expected to yield a new round of talks between the US and China to be held later this year.
The gold suffered another setback, as two prominent Fed members, Chair Powell and FOMC voting member and known dove Bullard were less dovish than a week ago on Tuesday. A 50-basis point rate cut is off the table as per Bullard next meeting but the sense that there is no urgency from the Fed was not lost on the market.
US President Trump was back on the offensive against the Fed, and he called the current monetary policy “insane”. Trump was disappointed that the Fed did not cut rates in its June Federal Open Market Committee (FOMC) meeting.
Even though the Fed has hinted at an upcoming rate cut, the comments of 50 basis points being too much, could end up with the central bank holding rates steady if economic indicators rebound in the short term. Today’s data was mixed with core durable goods beating the forecast, but the headline of new purchases by manufacturers going into negative territory for a second month in a row and with a downward revision to the previous data point.
STOCKS – Equities mixed on Less Dovish Fed and G20 Uncertainty
Equities continued to lose momentum on Wednesday as Middle Eastern tensions, trade anxiety and a less dovish Fed did not combine to reassure investors. The Trump administration is trying to downplay expectations of a significant outcome of the upcoming meeting between Presidents Trump and Xi in Japan. The two leaders will meet at a sidebar of their G20 commitments and given the huge distance in their negotiating positions there is now little probability of a major announcement on trade.
The Fed chair and the most prominent dove in the FOMC were less dovish than two weeks ago. Chair Powell stressed the negative impact trade disputes have on economic growth, but he continues to be hawkish on the American economy despite the latest indicators showing some softness. Powell remarked that even the tariffs have not put a lot of pressure, the Fed’s chief main job at the moment is to manage the expectations of the market.
The G20 meeting is likely not to produce an agreement despite positive comments by US Treasury Secretary Mnuchin, but at least the two nations are back on the table, Powell could feel secure in calling current headwinds temporary awaiting a rebound of economic indicators such as GDP and the expected jobs rebound in the first week of July.
CRYPTO – Bitcoin Gets Safe Haven and Libra Boost
Bitcoin prices hit an 18-month high at it smashed the $13,000 price level and is trading at $13,619 on the back of Facebook’s entry into the crypto world. The introduction of Libra is validating the claim of bitcoin as an alternative asset class, especially with current market conditions when investors seek to diversify to hedge against uncertainty.
The new easing monetary policy cycle is another factor contributing to the rise of bitcoin as appetite for higher yields could drive investors away from more traditional asset classes and into the crypto world.
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