USD/CAD Canadian Dollar Higher as Trade Truce Rally Fades

The Canadian dollar rose 0.1 percent against the US dollar on Tuesday. The Canada day holiday had put the loonie in a vulnerable spot as the G20 wrapped up with Presidents Trump and Xi agreeing to restart negotiations on trade. The outcome was not the best-case scenario for the market as there were no details revealed on when the new rounds will take place, or how far apart both parties are.

Canadian manufacturing is not expanding, with the common thread of contraction that the economies of China and Europe have reported this week. Trade headwinds are to blame for the lack of traction and the prolonged dispute between the US and China has put downward pressure on global growth.

usdcad Canadian dollar graph, July 2, 2019

Up ahead for the Canadian currency is the release of the trade balance on Wednesday and employment and PMI data on Friday. Last month, while the U.S. non-farm payrolls (NFP) disappointed with less than 100,000 jobs in the US, the Canadian employment report surprised with a 5X gain even after the monster 106,000 job gain in April. This time around the forecast in the US calls for a rebound after the data miss and Canadian numbers should fall back to reality with 10,000 added positions in June.

The US dollar is on the back foot as the trade win from the G20 is looking more like a tie. Global growth concerns after global manufacturing indicators disappointed and the US opening another trade front after threatening the EU with more tariffs to offset government aid to the aviation industry.

Central banks continue to signal lower rates for longer. The Reserve Bank of Australia (RBA) was the latest to cut its benchmark interest rate but is satisfied with the new level and its optimistic about the economic outlook.

Christine Lagarde of the IMF was nominated to replace Mario Draghi when he steps down at the European Central Bank (ECB) at the end of October.

OIL – Crude Drops on Global Demand Concerns Despite OPEC+ Deal

Oil prices fell hard on Tuesday despite the OPEC+ announcing a 9-month extension for their production cut agreement. Manufacturing data in China and Europe came in below expectations and is putting a huge question mark on energy demand going forward.

The G20 meeting lacked the trade catalyst needed for energy prices to really take off. The meeting between Saudi Arabia and Russia was the most productive sideline event as the OPEC+ extension was announced back then, but without a real breakthrough on the tariff war between the US and China it was not enough.

West Texas Intermediate graph

The prolonged trade war is now on ice after both sides agreed to a truce, but the market has seen this before and based on the aggressive demands from the US, it could unravel once again.

Supply data on Wednesday as the EIA published the weekly US crude inventories could show a smaller contraction after two consecutive drawdowns

GOLD – Gold Rebounds as Trade Hopes Fade

Gold rose on Tuesday as the metal once again traded above $1,400 as the G20 trade optimism started to dissipate. Weak global manufacturing and comments from US officials on the length and difficulty of the US-China deal put gold back in play as a safe haven.

The Trump-Xi sit-down had a weaker outcome than expected with negotiations back at square one, and the US taking an aggressive stance while China has signalled it won’t back down, the recipe for long and difficult negotiations. The news that the White House is ready to reopen a trade front as it threatened new tariffs on EU exports was a positive for gold.

Central banks will not be an obstacle for the yellow metal. The Reserve Bank of Australia (RBA) cut rates on Tuesday to 1 percent and the Fed is expected to cut the benchmark rate at least once this year. Easing monetary policy is back in vogue as global growth has failed to gather momentum.

STOCKS – US Stocks Hit New High Ahead of Short Trading Session

US stocks rose to a new record high, despite concerns about global growth. Safe havens gained ahead of the Fourth of July holiday as trade optimism is beginning to fade as the truce with China is not even a week old and the US is looking for its next trade battle. The dovish turn by the Fed is keeping the dollar under pressure and driving investors to look for more risk as the benchmark interest rate will be lower.

US manufacturing was a pleasant surprise and continues to show the difference in economic growth between the US and other major economies. The US market will close early for the Independence Day celebrations, but traders will be back at the desk for Friday’s U.S. non-farm payrolls (NFP). A rebound of last month’s disappointing report is expected with a gain of 170,000 jobs in June.

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Alfonso Esparza

Alfonso Esparza

Senior Currency Analyst at Market Pulse
Alfonso Esparza specializes in macro forex strategies for North American and major currency pairs. Upon joining OANDA in 2007, Alfonso Esparza established the MarketPulseFX blog and he has since written extensively about central banks and global economic and political trends. Alfonso has also worked as a professional currency trader focused on North America and emerging markets. He has been published by The MarketWatch, Reuters, the Wall Street Journal and The Globe and Mail, and he also appears regularly as a guest commentator on networks including Bloomberg and BNN. He holds a finance degree from the Monterrey Institute of Technology and Higher Education (ITESM) and an MBA with a specialization on financial engineering and marketing from the University of Toronto.
Alfonso Esparza