Dollar Weakens as US and Mexico Reach New Trade Agreement
What’s been happening?
Pound Sterling – UK Markets
With the UK enjoying the Late Summer Holiday on Monday, markets’ risk perception and the broad-based USD weakness allowed the sterling to find demand. However, once again, it failed to gather strength against the euro on hard-Brexit worries. In an interview with the Irish State Broadcaster RTE, Irish Foreign Minister Simon Coveney reiterated that he saw a no-deal Brexit as a “very, very unlikely,” outcome and added that Ireland wouldn’t change its stance when it comes to the issue of the Irish border.
On the other hand, Joachim Lang, the head of the Federation of German Industries (BDI), told German newspaper Rheinische Post that every business needed to prepare for the worst-case scenario as the risk of a hard-Brexit was increasing day by day. Meanwhile, according to The Independent, speaking to French ambassadors on Monday, “France wants to maintain a strong, special relationship with London but not if the cost is the European Union's unravelling," French President Emmanuel Macron said.
US Dollar – US Markets
US President Donald Trump on Monday announced that they reached a new trade deal with Mexico that would replace the North American Free Trade Agreement (NAFTA). Mexican President Enrique Pena Nieto said he was hopeful that Canada would take its place in the new trade accord as well. The dollar, which outperformed its rivals in the past couple of months as a safer asset, came under a heavy selling pressure. Moreover, mixed macroeconomic data releases didn’t allow the greenback to recover its losses. The US Dollar Index, which tracks the buck against a basket of six major currencies, fell to its lowest level in more than three weeks at 94.70.
The Federal Reserve Bank of Chicago’s closely-followed National Activity Index fell to 0.13 in July from 0.48 in June. “The CFNAI Diffusion Index, which is also a three-month moving average, decreased to +0.08 in July from +0.19 in June. Thirty-six of the 85 individual indicators made positive contributions to the CFNAI in July, while 49 made negative contributions. Thirty-four indicators improved from June to July, while 51 indicators deteriorated. Of the indicators that improved, 13 made negative contributions,” Chicago Fed noted in the publication.
Later in the day, the Federal Reserve Bank of Dallas published the findings of its latest Texas Manufacturing Outlook Survey. Despite a fall to 30.9 in August from 32.3 in July in the headlines number, Dallas Fed that the activity in the regional manufacturing industry maintained its momentum. “Labor market measures continued to suggest robust hiring and longer work hours. The employment index remained at a 13-year high of 28.9. Thirty-four percent of firms noted net hiring, compared with 5 percent noting net layoffs. The hours worked index edged down to 19.0,” Dallas Fed explained.
Euro – European Markets
The monthly business sentiment survey conducted by the CESifo Group revealed that business confidence in German firms increased noticeably in August, which suggested that the economic expansion would gather momentum in the third quarter. “The companies were once again more satisfied with their current business situation. Business expectations were revised noticeably upwards. In addition to a robust domestic economic situation, the truce in the trade conflict with the US contributed to improved business confidence. The German economy is performing robustly. Current figures point to the economic growth of 0.5 percent in the third quarter,” CESifo Group stated in its press release. Upbeat data from the Eurozone’s biggest economy helped the shared currency preserve its upward momentum on Monday.
What’s coming up?
UK: There won’t be any macroeconomic data releases from the UK and investors will continue to look for Brexit headlines.
US: Wholesale inventories and goods trade balance will be featured in the US economic docket on Tuesday. Additionally, the Federal Reserve Bank of Richmond will publish its regional Manufacturing Index.
EU: The European Central Bank will publish private loans and M3 money supply figures, which are unlikely to have a significant impact on the euro’s price action.