– Dollar’s strength under fresh attack ahead of the weekend

– European Union, China accused of currency manipulation

– But there is little Trump can do to stop the Dollar’s ascent say analysts

– Seperately, Trump threatens to tariff all China’s imports

Ed Note: for the impact on markets that Trump’s attack has had check out ZeroHedge’s “Dollar Tumbles As Trump Blasts China, EU “Currency Manipulation”, Fed “Tightening”

US President Donald Trump has fired another salvo in what appears to be the start of a potential currency war by accusing the European Union, China, and others, of artificially massaging their interest rates and currency lower.

“China, the European Union and others have been manipulating their currencies and interest rates lower, while the U.S. is raising rates while the Dollar gets stronger and stronger with each passing day – taking away our big competitive edge. As usual, not a level playing field,” Trump tweet at 13:43 B.S.T.

The tweet sent the US Dollar lower allowing the Pound-to-Dollar exchange rate the chance to stage a climb back to 1.3062, having been below 1.30 just 24 hours earlier. The EUR/USD exchange rate menawhile rose 0.45% on the day to reach 1.1707.

The tweet builds on an earlier attack by Trump on the Dollar’s strength when he said in an interview he is “not thrilled” by the Federal Reserve’s ongoing interest rate hikes which are providing the key underpinning to a stronger US Dollar.

The Fed came in for another mention via a 1:51 P.M. tweet that came hot on the heels of that accusing the EU and China of manipulating their currency:

“The United States should not be penalized because we are doing so well. Tightening now hurts all that we have done. The U.S. should be allowed to recapture what was lost due to illegal currency manipulation and BAD Trade Deals. Debt coming due & we are raising rates – Really?”

The message from Trump is that the stronger Dollar is unattractive to him as he tries to improve the USA’s global trade performance, and the Fed is partly responsible.

No doubt Trump has been keeping an eye on the sharp rise in the value of the Dollar against the Chinese Renminbi of late, a move that is softening the blow to China of the tariffs lifted against Chinese imports.

Seperately, Trump has threatened to put tariffs on all $500BN worth of goods imported by the USA in a sign that there will be an end-game to the trade war.

This appears to be a strong, all-out attack on China which is extraordinary.

But, the attack on the European Union is also extraordinary if we consider the accusations being levelled against the European Central Bank (which ultimately manages the Eurozone’s currency) could just have easily have been levelled against the US Federal Reserve a few years ago.

The ‘manipulation’ of the Euro no doubt refers to the ECB’s quanitative easing programme whereby the central bank purchases tranches of government and corporate bonds in order to keep the yield (interest rate) paid by those bonds low. Hence, interest rates are kept low which in turn keeps the currency discounted.

But, quantitative easing was introduced by the US Fed long before the ECB! 

“FX markets were rattled by Trump’s comments that he prefers a weaker USD and lower interest rate policy,” say TD Securities in a foreign exchange briefing.

The obvious question at this juncture is whether or not Trump has the ability to succeed in driving a weaker Dollar?

We have seen time and again that rhetoric can have an impact on currencies, but for a limited time. What is important is that the rhetoric is backed up by real action.

If not, the bluster loses its impact.

Therefore the US President must come up with a strategy of materially weakening the Dollar if he is to succeed in bringing it down on a sustainable basis.

“Substitutes to the USD are not as attractive at this time given that it still holds a considerable carry advantage. As such, the moves in EUR & JPY are likely to be short-lived,” say TD Securities.

Analyst Adam Cole with RBC Capital Markets meanwhile briefs that “the risk of the Federal yielding to political pressure is minimal.”

We agree with this view – there is very little chance the Federal Reserve will yield to the President and they will likely maintain their current policy stance to deliver a slew of further interest rate rises.

What would shift the Fed’s stance is a slowdown in economic activity, and for Trump this would be considered a sour turn of events.

Indeed on this basis, the President will sleep better with the knowledge the Dollar is rising rather than falling as confidence in his economy fades.

However, analysts at ING Bank N.V. believe that Trump’s comments will mark an end to the Dollar’s rise.

“The President’s comments are more likely to, on the margin, stem flows into USD assets given renewed uncertainty over the US administration’s dollar policy,” says Viraj Patel, a foreign exchange strategist with ING in London. “We’re unlikely to see the same degree (and sharp extent) of USD weakness that we saw the last time administration talked about the Dollar.”

In January 2018, during the last episode of weaker Dollar rhetoric, Patel notes the Dollar index index fell around 5% over a short window, with Secretary Mnuchin partly adding fuel to the weak USD fire. 

“We shouldn’t get too carried away. The political economy of the Dollar is a medium-term negative; however, the fundamental outlook for major currencies – such as the EUR, JPY and CNY – is considerably weaker relative to January 2018,” adds Patel.

The strength of the USD is starting to become a lot more visible over the past 48 hours. In some countries, its looks as though currencies require a helping hand just to slow their downward spiral. In Japan the battle surrounding the Yen being a safe-haven or not continues, but looks to be losing at present. In late trading we play around the 113 number as the Nikkei dipped just at the cash close. In A$ is a classic example of this with the currency down almost 1% whilst the ASX (+0.45%) benefitted from its decline. The Yuan remains heavy (1yr low today) as the rebalancing continues and so we saw currency and core stock indices’ decline again today. The SENSEX was unsure which direction to play, but as confidence is drained so we see stock and the INR lose friends. The INR closes with a 69 handle, but sadly still has plenty to run.

All of core Europe suffered today either through stock or currency. The Euro held reasonably well having recovered from heavier intraday losses, the last look was down around -0.3%. However, core DAX, CAC, IBEX and FTSE MIB all traded lower by around -0.6%. The UK’s FTSE was the only positive (+0.10%) but that was because the GBP lost -0.7%. It was down more but saw a small bounce on expected better Retail Sales but could edged only marginally better but that could well be too late. This evening the new BREXIT negotiator (Dominic Raab) meets with Michel Barnier for the first time, so all headlines will be closely scrutinised. The market is still not pricing-in a ‘No Deal’ so this could well be the catalyst that pushes Sterling over the edge. We did hear more negative forecasts of that today with a few houses calling 1.10 by year end, given this eventuality. Both GBP and Euro trade heavy even with big buyers lurking around.

Core US indices were in negative territory all day. There were a couple of times mid-afternoon where it looked as though that could change, but all were denied. However, we did see the Russell 2k move from strength to strength even closing up +0.5% on the day. We saw the lows hit just into the close, but then given the broad strength of the USD they held in reasonably well. Financials falling around 1.5% reversing much of their recent gains. Commodities (Industrial Metals) and retailers (eBay down 12%) feeling the heat with increased competition and a slowing consumer base.

Japan 0.03%, US 2’s 2.60% (-3bp), 10’s 2.84% (-4bp), 30’s 2.965% (-2.5bp), Bunds 0.33% (-1bp), France 0.62% (u/c), Italy 2.50% (u/c), Greece 3.82% (u/c), Turkey 17.10% (+2bp), Portugal 1.74%, Spain 1.27% (u/c), and Gilts 1.18% (-4bp).

….also from Martin: Complexity & Quantum Computing

Bank of Canada governor Stephen Poloz is gave a speech titled “Let Me Be Clear: From Transparency to Trust and Understanding” that will be scrutinized closely for any hints as to what the Bank of Canada will do with rates at its next meeting on July 11th. It will be so closely watched because the market it currently pricing in a 60% chance of rate hike, but that number has been as high as 80% and as low as 50% in the last two weeks. Clearly showing the market is unsure whether the bank will raise rates or leave them unchanged. If Poloz sounds hawkish, I would expect those odds to increase and that CAD would rally. If he sounds dovish/overly cautious, I think CAD could see a sharp selloff.

We have two other key economic reports before the meeting, April GDP this Friday and June employment next Friday. His speech will add insight to his leanings, but a miss on either or both of these reports would make it more troublesome to raise rates. While inflation has firmed, last Friday’s core CPI miss gives the bank no urgent need to rush into raising rates. With softness in housing numbers and the high debt levels of Canadians, Poloz has many reasons to remain “cautious” going forward. I think Poloz will only sound hawkish if he wants to keep rates moving higher to try and get back to a more “neutral rate” before it’s too late. If that is the mindset of the bank, it would take a huge miss in remaining data points to derail them. Once again, why the speech could be so important.

WTI oil prices have risen dramatically over the past several days which usually helps the CAD. The pressure to end Iranian crude shipments is a real worry for global supplies. However much of the talk last week was about OPEC agreeing to higher production levels, but big news for WTI prices was an outage at a Syncrude upgrader that took 360K bpd off the market until the end of July. This caused the front month price of crude to rally significantly. But Alberta has been stockpiling crude, unable to get enough to the US due to a lack of pipelines/rail, so the supply in Alberta to keep the pipeline full for a month shouldn’t be out of the question. Second, any crude price increase that comes from a lack of supply from Canada, does not help Canada. We saw an example of this when the wildfires wreaked havoc on northern Alberta in 2016 and cut oil supply. As the fire burned through the month of May CAD dropped 4 cents.

The recent economic data has been softening in CAD and the 2yr interest rates spreads with the US have moved out to new 11yr lows. This has brought the CAD lower, however it has held in around the 75 cent level even despite the recent miss on CPI and retail sales last Friday. The chart below shows that interest rate pressure should be taking CAD lower as the red lines show the interest rate differential (orange line) recently took out the low of the past 2cycles at around 60bps(now over 70bps). At the same time CAD has been putting in higher lows, the yellow lines, in each of these cycles. Oil prices(blue line) do explain the stronger CAD at each interest rate low, however the recent oil price action may be misleading and keeping CAD firmer than it should be.

We have also seen a little softness in the USD that may have helped CAD stay steady over the week, but any further USD strength will be additional pressure on CAD.

Oil prices are up over the past year, which is bad if you’re, say, a developing country that imports a lot of the stuff. But the US dollar (aka the petrodollar) is also up, which compounds the problem because oil is priced in dollars. So Brazil, for instance, finds itself buying an appreciating necessity that’s priced in an appreciating currency. The result is serious trouble for at least some countries in that position. From Saturday’s Wall Street Journal: 

Steep Oil and Strong Dollar Make Toxic Brew for Global Economies

‘Brutal’ rally in dollar-priced crude hammers governments, strains consumers from U.K. to Brazil.

For Americans, rising oil prices are threatening $3-a-gallon gasoline and pushing up prices for plane tickets. In many other parts of the world, today’s crude rally is more painful—sparking protests, gas lines and emergency subsidies to quell unrest.

That is because many consumers outside the U.S. face a double whammy when—like now—the dollar gets stronger at the same time that oil prices rise. While petroleum is produced all over the globe, when it is sold to refiners and other buyers it is almost always priced in dollars.

It is, in the words of Brazilian Finance Minister Eduardo Guardia, “a challenging external scenario.”

After Brazil’s military brought an end to a crippling strike by truck drivers over high fuel prices, Mr. Guardia called the oil rally “brutal” for his country.

Brazil is among the handful of oil-dependent countries in Latin America and Southeast Asia that have turned to costly fuel subsidies. Across swaths of Africa, higher fuel costs and weakening local currencies have hit prices for food and electronics.

Fast-rising crude, on its own, has been pressuring global growth for months. Swiss bank UBS figures that today’s international crude price, around $75 a barrel, would boost global inflation by more than half a percentage point, compared with the $50 barrels the world enjoyed as recently as last year.

Brent crude, the international benchmark, has eased off a recent 3½-year high of around $80, on expectations that the Organization of the Petroleum Exporting Countries will boost output when it meets this week. Before that retreat, oil was up more than 20% this year.

There are global winners, along with losers. The U.S., squeezed over the decades in past oil rallies, is looking pretty comfortable this time. In recent years, America has boosted production significantly, making it much less dependent on imports.

Fuel prices can be  articularly painful for specific swaths of any economy. This month, Chinese truckers refused to move goods and blocked roads in a handful of cities, protesting higher fuel costs.

Exacerbating the pain in many countries is a strengthening dollar. The WSJ Dollar Index, a measure of the dollar compared with a basket of 16 major currencies, has strengthened 6% since February.

In Europe, dollar strength against the euro has helped make crude today about 30% more expensive than when oil was at a low in February.
For European consumers, gasoline-price shocks are often dampened by the continent’s generally steep taxes on the fuel. That makes the cost of oil a smaller percentage of the overall price of a liter of gas.

This year’s price increase, though, has been so steep that many drivers are feeling the squeeze. Gasoline prices in Britain rose faster in May than in any month on record, according to RAC, a drivers’ lobby group, which called it a “hellish month.” A lower pound against the dollar and higher oil prices were a “toxic combination,” an RAC spokesman said.

Brent crude is still well below the $100-plus a barrel it fetched from 2011 through 2014, and prices probably aren’t high enough to knock the European economy from its recent upward trajectory.

Still, the oil and dollar rally act like a tax, limiting consumers’ discretionary spending. That threatens a pullback in consumption that can eventually hit growth. It can also feed into inflation and pressure central banks to boost borrowing rates. Inflation in Spain jumped to an annualized 2.2% last year from minus 0.2% in 2016, largely due to higher energy prices.

The pain has been greatest in economies where dollar strength has been even more pronounced. In Brazil, gasoline is up 28% and diesel fuel for trucks more than 27% over the past year. The Brazilian real has fallen 11% this year against the dollar.

The two-week strike by Brazilian truckers stranded goods across the country, triggering warnings about possible shortages from grocery stores, hospitals and McDonald’s outlets. To end the walkout, President Michel Temer rolled out the military and promised truckers $3 billion in diesel-fuel subsides and tax cuts.

Brazil’s government has restricted how often fuel suppliers can raise prices, at once a month. As energy prices rose, economists polled by the central bank slashed a full percentage point of growth off Brazil’s forecast output this year, to 2%.

In Indonesia, where the rupiah has fallen to its weakest level against the dollar in more than two years, fuel prices are an election issue. President Joko Widodo has promised not to raise prices of subsidized fuels and electricity through 2019, when he is expected to run for a second term. In April, he required fuel retailers, including foreign firms Royal Dutch Shell PLC and Total SA, to seek government approval before raising prices they charge at the pump.

Jakarta also said it would dramatically increase diesel subsidies. Thailand and Malaysia—where newly elected Prime Minister Mahathir Mohamed made it a campaign pledge—have both ramped up spending to stabilize pump prices.

To sum up the dynamic: Rising oil prices lead to disruptions which force the local government to increase fuel subsidies, which weakens the local currency versus the dollar, which raises oil prices further, which causes disruptions, and so on, until the country turns into Argentina.

So if you’re tracking the “crises move from the periphery to the core” thesis, one good guide is the flow of oil. If a country is a big net importer of oil and both the price of oil and the petrodollar exchange rate are rising, it might be the next domino to fall.

• Manufacturing sales in Canada contract in April.
• NY Fed Manufacturing Index beats expectations.
• USD/CAD rises to its highest level in nearly year above 1.31.

The USD/CAD pair, which closed the previous day with a 150 pips gain, built on it recent gains at the beginning of the NA session and touched its highest level since late June of 2017 at 1.3170. As of writing, the pair was trading at 1.3165, adding 0.5%, or 65 pips, on the day.

Today’s data from Canada showed that the manufacturing sales contracted by 1.3% in April following March’s 1.4% expansion and fell short of the market expectation of 0.6%. With the loonie facing a fresh selling wave amid the disappointing figures, the pair gained nearly 50 pips in the last hour.

On the other hand, the monthly report released by the Federal Reserve Bank of New York showed that the general headline index of the Manufacturing Survey improved to 25 in May to beat the experts’ estimate of 19. Despite the positive reading, the US Dollar Index remained in its recent range below the 95 mark and was last seen at 94.80, where it was down 0.15% on the day.

Meanwhile, the weak performance of crude oil prices weighs on the commodity-sensitive CAD as well. After closing the first four days of the week with modest gains, the barrel of WTI is looking to end the week on a negative note as it loses 0.5% at the moment.

Technical outlook

Click chart for larger image

The pair could face the first technical resistance at 1.3200 (psychological level). A decisive rise above that level could open the door for further gains toward 1.3260 (Jun. 27, 2017, high) and 1.3340 (Jun. 21, 2017, high). On the downside, supports are located at 1.3115 (daily low), 1.3000 (psychological level) and 1.2950 (Jun. 14 low).