Global Themes

The growing risk of a trade war sparked a stampede into safer assets, buoying the U.S. dollar, yen and Swiss franc. The euro and sterling were at or near 2018 lows while commodity currencies from Canada and Australian tumbled to one-year lows. President Trump has threatened to slap larger tariffs on China in a bid to help narrow America’s long running trade deficit. China has threatened to ramp up tariffs on U.S. exports. The protectionist gamesmanship has rattled markets and fanned uncertainty on a global scale, buoying haven assets. It’s unclear whether a trade war would be good or bad for the dollar. On the one hand, higher prices on the goods that America imports could slow growth, but it could also stoke inflation, causing the Federal Reserve to raise rates more aggressively. Emerging markets, like Mexico’s peso, bore the brunt of trade war fears and sold off sharply.

MXN

A nearly 1% slide in the Mexican peso had it dangerously close to 1 ½ year lows – and not far from historic lows. Elevated uncertainties over global trade and politics on the home front have taken a toll on the peso. Mexico’s economy depends on U.S. demand for the lion’s share of its exports. Mexicans, meanwhile, are less than a few weeks from choosing their next president.

GBP

Sterling got caught up in a global market sell-off that yanked the U.K. unit to 2018 lows against its safer U.S. counterpart. This week could be nothing short of a roller coaster for sterling with the Bank of England rendering an interest rate announcement Thursday. No change to the bank’s 0.5% base rate is expected after the British economy barely grew over the opening quarter of the year. Key for sterling will be whether the BOE intends to raise rates at all this year. A hawkish message that paves the way to a late summer rate hike would tend to be pound-positive. 

EUR

The euro sank toward lows for the year against the dollar, a dip that had the single currency in closer range of recent July 2017 lows. The last thing Europe needs is a growing risk of a global trade skirmish. That’s because the bloc’s economy has slowed over recent months. Therefore, a trade war could put a stiffer headwind on growth and risk an even longer wait for the ECB to raise interest rates from crisis lows of zero.

CAD

A dive in oil markets and broader risk sentiment wreaked havoc for commodity currencies, tugging Canada’s to one-year lows. Oil prices plunged more than a percent to below $65, weighing on energy-related currencies. Meanwhile, U.S.-Canada trade relations have hit a low, undermining confidence in Nafta remaining intact. The loonie will look for a fundamental catalyst in Friday data on Canadian inflation and retail sales, key numbers that could potentially make or break a Bank of Canada rate hike next month.

Deliver the Daily Currency Market Analysis to my Inbox

Published five days a week, this newsletter provides day-to-day trends and activities affecting the market in easy-to-understand snapshots.