Currency wars are back?

US President Donald Trump tweeted that China and Europe are manipulating their currencies to compete with USA and not to be left behind, Bank of England Governor Mark Carney also talked down the pound sterling. Federal Reserve Chair Powell’s testimony to Congress was seen as dovish, suggesting an interest rate cut in the US later this month is a done deal. And that would happen amid full employment, solid economic growth of 3% per year and S&P 500 reaching an all time high above 3000. All leads to the suspicion of a return to a currency war?

Gold remained above $1400 mark as Bloomberg reported that central banks buying in 2019 is on track for 700 tons, which represents an increase of 73% compared with last year. The main reasons were slowdown in economic growth, geopolitical tensions and trade disputes as well as attempts to diversify reserves from fiat currencies.  

China June Inflation data showed CPI at 2.7%, in line with expectations the lowest since August 2016, which could be problematic for industrial profits going forward.

In the US, FOMC June meeting minutes saw many Fed officials calling for a rate cut as a ‘cushion for shocks’ adding that inflation expectations were inconsistent with the 2% goal.

In UK, the pound fell below 1.25 to the dollar to a low of 1.2440, the weakest level since April 2017. The slump was based on the lingering Brexit uncertainty still weighing on the economy which is expected to contract in Q2, the first time in 7 years. UK Prime Minister contender Boris Johnson maintains that the country must be prepared to leave EU without a deal. On Friday GBPUSD rebounded slightly around 1.2550.

Meanwhile the former International Monetary Fund Chief Christine Lagarde is set to be confirmed as the new ECB President in October. At the same time European Commission warned of rising downside risks and downgraded the euro zone economic outlook in its latest forecast. ECB minutes also indicated a governing council agreeing on the need to prepare for policy easing. Despite that we can see EURUSD holding between 1.1240 to 1.1280 range.

Gold price breaks higher

Gold made a break above the $1350 – $1360 area which has offered solid resistance for the last few years, reaching $1400 level. The move came after the Federal Reserve hinted it will soften its monetary policy thus hurting the greenback.
China has cut its holdings of US Treasury by $7.5 billion in April to $1.11 trillion, the lowest mark in almost two years according to Bloomberg. At the same time People’s Bank of China added 240 billion yuan into the banking system, via a one-year (medium term) lending facility, in an attempt to increase banking liquidity. To further counter the US tariffs and limit the damage on its economy, China has lowered duties on non-US imports.
The US Federal Reserve held interest rates unchanged in a range between 2.25% – 2.5%, as anticipated, but added the economic activity has been rising at a moderate pace (changed from ‘solid pace’ last month). Chair Powell acknowledged that inflation dropped, trade risks have grown but ‘he wanted to see more’ before cutting. Markets have now almost fully priced in a rate cut of 25 basis points in July with further cuts expected to follow. Quite a turnaround over the year..
After dropping to a recent low of 1.25 to the dollar, the pound sterling managed a small rebound following steady inflation data with CPI figures coming in at +2.0%, in line with consensus. However, selling pressure remains with the continues political uncertainty. On Thursday, the Bank of England left its benchmark rate unchanged at 0.75% with overall language also remaining the same.
Meanwhile ECB President Mario Draghi said more rate cuts are part of the central bank’s key tools, joining the US Fed in taking a renewed dovish stance. Ironically, such actions attracted indignation from President Trump who tweeted that ‘ECB chief remarks make it unfairly easier for them to compete against the US’.
Reserve Bank of Australia has released its June 2019 monetary policy board meeting minutes saying further easing would be appropriate. The labour market, in particular, would be expected to bear the most weight, although lower rates are expected to push down the value of Aussie dollar.

US June payrolls up by 224k vs 160k expected

 Gold tumbled to $1383 on the back of a stronger USD, following a positive meeting between Chinese and US Presidents over the weekend. Nonetheless the sell-off was rather short lived and a rebound soon followed with the precious metal pushing back above $1430 within two days. Hitting perfect technical retracement levels. 

The highlight of the Trump-Xi meeting at G20 summit is that both sides have agreed to restart trade talks and there will be no new levies on Chinese goods. Meanwhile the focus shifted with and the US proposing to add more tariffs to $4 bln worth of EU goods. 

China’s June Caixin Manufacturing PMI came in at 49.4 vs 50.1 anticipated. It is the second lowest reading since June 2016 showing a contraction in manufacturing as the overall economy slips further into the red. However Premier Li Keqiang was adamant earlier in the week that China will not resort to yuan devaluation. 

ECB policymakers seemed confident they don’t need to add monetary stimulus in July preferring instead to wait for more data on the economy (no mention of QE). EURUSD was on the downside for the whole week testing lows of 1.12 at the time of writing. Meanwhile EU leaders agreed to appoint Christine Lagarde (the current IMF chief) as the next ECB President 

OPEC agreed to extend the production cuts by an additional 9 months, concerned with the excess oil supply from the US. The trade truce is seen as bullish for global growth but the rally in oil prices was short lived as the markets came off the highs. 

On Friday, the US nonfarm payrolls report showed 224k jobs were added in June, a lot higher than markets had anticipated. In reaction, the Dow fell 100 points and gold prices slipped below $1400 (hovering around $1415 before the announcement) amid a strengthening US dollar. Analysts were quick to speculate the numbers would now make it much harder for the Fed to justify a rate cut at the next meeting ( if it wasn’t for a meddling President who has three words in regards to monetary policy ‘cut cut cut’….). 

The pound sterling started the week on the back foot due to ongoing poor UK data. It fell below the previously good support level of 1.25 USD after the US jobs report.