The Canadian dollar lost 0.55 percent on Tuesday. The US dollar is higher after the Chinese central bank intervened on behalf of the yuan to stop its downward slide and avoid triggering a full blown currency war. Fed speakers are also supporting more interest-rate cuts to the US benchmark rate, but the timing remains nebulous as more data is needed, which opens the door for the Fed to remain on the sidelines.
The loonie was the worst major currency against the US dollar on Tuesday. A Canadian holiday on Monday forced markets to catch up a day later and the CAD is lower against the greenback as trade-war anxiety has reached new highs after China answered Trump’s new tariffs on $300 billions of Chinese consumer goods with an immediate stop on imports of US agricultural products.
Canadian data has remained mixed, giving some breathing room to the Bank of Canada (BoC), but the deterioration in the commercial relationship between the US and China could force the central bank to act sooner rather than later and reduce the gap between US and Canadian interest rates.
The Fed does not appear committed to an easing cycle, despite cutting rates in July, but pressure from the White House and market expectations will keep pushing for lower rates despite what the indicators show.
The US dollar rose against safe havens as risk appetite made a tentative return on Tuesday. The move by the PBOC to strengthen the yuan calmed markets after a drop on Monday. Emerging markets got some breathing room and rebounded as trade-war concerns remain very much front of mind. Washington also hinted at a new round of trade talks in September, but at this point more details and statements from both sides are needed to inject calm into a volatile market.
Trade- and currency-war headwinds kept energy prices low on Tuesday. West Texas Intermediate fell 1.97 and Brent 1.44 percent as the escalating tariff war has now spilled over into the FX world as the US accused China of currency manipulation.
The negative effect on global growth on the prolonged trade war will continue, as downgrades will need to be applied as the two economic behemoths battle it out on the trade front. Before the falling out last week, oil prices had risen as the market showed optimism of a trade deal in the near future. That is no longer the case as both sides came out swinging.
With no cooperation in sight, oil will be caught between future growth prospects and ample crude supply despite the best efforts of the OPEC+. The agreement to limit production has reduced some excess supply, but the efforts have been boosted by the Iran and Venezuela sanctions.
If the US-China dispute continues, the Asian nation could seek to buy Iranian crude instead of American oil as another trade offensive after US president Trump threatened a 10 percent rise in tariffs to come on September 1.
Weather disruptions are giving crude some support as weekly inventory data has shown large drawdowns due to Hurricane Barry, but eventually producers and refiners will close the gap.
Gold continues its rally as the metal rose 0.43 percent on the back of safe haven flows. The US-China trade row has triggered volatility and uncertainty in the market and investors are liquidating riskier positions and finding refuge in the yellow metal.
Gold lost some momentum at the end of July as Fed Chair Powell confused markets by delivering a much awaited rate cut but giving no guidance on the rest of the year, even sounding hawkish at times during the press conference immediately following the FOMC rate statement.
Gold found another gear upward as US President Trump escalated the trade war with China after the US delegation did not achieve the results his administration expected. Additional tariffs triggered a response by China and the state of negotiations is unknown, but a quick agreement is out of the question.
US Equities rebounded as China intervened to strengthen the yuan after being branded a currency manipulator by the United States. The move was seen as a positive by the markets and the beginning of a potential truce. White House Adviser Larry Kudlow commented that a Chinese delegation would be in Washington.
The tech sector is one of the most exposed to trade-war risk and rebounded on the news, but concerns remain given the rapid escalation on both sides in just a matter of days.
Fed speakers have been mixed as St. Louis Fed Chief James Bullard supported current interest rates levels were appropriate. Bullard was the lone dissenter in June as he voted for a rate cut back then, but then walked back some of his dovish comments.