Trade Deal Versus Trade War Balance

NAFTA-negotiations.jpg

The U.S. dollar is mixed in the last week of August. Risk aversion has risen after the U.S.-Canada deal is close, but not agreed and new U.S. tariffs on Chinese goods could start next week lifting the greenback abasing emerging markets and the EUR and CAD with only the GBP still flying after potentially beneficial Brexit news and the safe havens CHF and JPY.

Trade concerns guided the market with the U.S.-Mexico and E.U. Barnier optimistic comments on Brexit giving way to a softer dollar earlier in the week but that was reversed as the weekend is near.

Next week the economic calendar is full to the brim. The Labor Day holiday in the U.S. and Canada will make it an even shorter week to get more done.

Central banks will be well represented with the Reserve Bank of Australia to publish its rate statement on Tuesday, September 4, expected at no change and a press conference with Governor Lowe.

The Bank of England Governor Mark Carney will testify before the Treasury Select Committee on Tuesday and the Bank of Canada will publish its rate statement on Wednesday, September 5. The probabilities of a September rate hike by the Bank of Canada have decreased as monthly GDP missed the forecast and trade uncertainty could make Governor Poloz push a highly anticipated rate lift to October.

U.S. jobs data releases will be crammed on Thursday and Friday with expectations the economy will keep the current solid pace and add 190,000 jobs with a 0.3 per cent wage growth gain. The U.S. nonfarm payroll will be published on Friday, September 7.


CANADIAN DOLLAR

The Canadian dollar fell 0.57 per cent on Friday versus the USD. The NAFTA 2.0 negotiations between Canada and the U.S. continue but comments from both sides make it seem that a deal is not close.

Read more about a deep dive on the Canadian Dollar in H2.

The remarks have been positive and both leaders and head negotiators have praised the potential benefits of reaching a deal but some issues are still unresolved. Both parties agreed not to discuss the details of the talks to the press while in the midst of negotiations so for the time being there has been little information on how far apart they really are.

The issues are not new as they also came up during the trilateral talks earlier in the year. Dairy is a big sticking point as the U.S. is pressing Canada to open up the market to more competition.

Dairy employs a large number of people and making some concessions could have a political cost to the Liberal party.

Canadian Prime Minister Justin Trudeau has emphasized that Canada is not seeking a deal at any costs, as it would be better to have no deal than a bad one.

Mexico waits on the sidelines and has repeated time and time again the need for Canada to join and to make a trilateral agreement. The U.S. preferred the bilateral agreement and moved into a high gear as the presidential transition after the Mexican elections allowed for an expedited deal.


EURO

The EUR/USD fell on Friday by 0.68 per cent as the looming end of the comment period on China tariffs expires next week. U.S. President Donald Trump has been said to support an additional $200 billion in tariffs after China retaliated to July round of extra duties. The trade tension between the U.S. and the European Union put pressure on the EUR.

Read more about how the Euro will perform in the 2nd half of the year.

Economic data in Europe was divided on Friday with the higher than expected losses in German retail sales and slightly lower inflation estimates edging out lower unemployment rate and higher inflation in Italy.

After a couple of quiet weeks on the release front, the week ahead presents a deluge of data around the globe. Trade talk will once again dominate headlines, but fundamentals will have a say with leading indicator PMIs in Europe and the U.S. being released. U.S. jobs will wrap the week with another solid NFP report expected but with all eyes scanning for the inflation component. Wages have dragged behind the number of jobs but are still expected to continue gaining at the same subdued pace.


Subscribe to our Weekly FX Newsletter

STERLING

Sterling is lower on Friday, but still has some of the Brexit optimism keeping it above 1.30. The remarks by the E.U.’s chief negotiator Michel Barnier of a special deal for the U.K. appreciated the pound almost 1.2 per cent. Today the currency has fallen by 0.35 per cent as risk aversion grips the market. The U.S. decision to pursue additional tariffs on Chinese goods has put growth concerns front and center and has taken the wind out of emerging markets. The Friday deadline on the U.S.-Canada imposed by U.S. president Donald Trump could come and go with no deal although.

GOLD

The yellow metal advanced versus the USD on Friday but will still end the week in the red. Risk aversion triggered by a tougher U.S. stance on trade has appreciated the USD. Investors are looking for safe havens and the USD, CHF and JPY have been preferred destinations.

The Labor Day weekend in the U.S. and Canada will make the North American session especially short and given the amount of data to be released investors should keep their eyes on the calendar and any trade announcements.

OIL

Brent and West Texas Intermediate rose this week against the USD. Metals were under pressure as risk appetite dwindled, but lower inventories in the U.S. and the impacts of the upcoming start on U.S. sanctions against Iran took crude to a two week gain. Crude is not immune from trade worries and lost ground on Friday as global growth could be threatened if tensions do not ease between the largest economies.


Market events to watch this week

Sunday, September 2
9:30pm AUD Retail Sales m/m

Monday, September 3
4:30am GBP Manufacturing PMI

Tuesday, September 4
12:30am AUD Cash Rate
12:30am AUD RBA Rate Statement
10:00am USD ISM Manufacturing PMI
9:30pm AUD GDP q/q

Wednesday, September 5
4:30am GBP Services PMI
8:30am CAD Trade Balance
10:00am CAD BOC Rate Statement
9:30pm AUD Trade Balance

Thursday, September 6
8:15am USD ADP Non-Farm Employment Change
10:00am USD ISM Non-Manufacturing PMI
11:00am USD Crude Oil Inventories

Friday, September 7
8:30am CAD Employment Change
8:30am CAD Unemployment Rate
8:30am USD Average Hourly Earnings m/m
8:30am USD Non-Farm Employment Change
8:30am USD Unemployment Rate

*All times EDT
For a complete list of scheduled events in the forex market visit the MarketPulse Economic Calendar.