Waiting for Beijing


With higher US tariffs on Chinese goods and no word, as yet, how Beijing will retaliate, investors are unsure how to proceed. As noted here on Friday, higher tariffs are theoretically beneficial to the USD because their inflationary effect would logically encourage the Federal Reserve to tighten monetary policy. The latest talk, however, is that the damage they cause to the economy could send the Fed in the opposition, cutting rates to preserve growth. For now, in ignorance of China's immediate intentions and the Fed's eventual reaction, the USD is in limbo.

Friday's consumer price index data did little to facilitate the decision-making. Headline inflation was a little lower than forecast at 2.0% while core inflation, excluding food and energy, was on target at 2.1%. The USD is unchanged on the day against the EUR and GBP.


Since the disappointing French and Italian production figures came out on Friday the euro zone statisticians have been silent. The EUR strengthened gently during the early part of Friday before gradually sinking back. It covered a range of just a quarter of a US cent and is unchanged on the day.

Benoît Cœuré, a member of the Executive Board of the European Central Bank had a speaking engagement in Paris. As a possible successor to ECB president Mario Draghi, M. Cœuré would normally get a thoughtful hearing from investors but that was not the case on Friday: they could not get past the title of his address: "Cybersecurity: Coordinating efforts to protect the financial sector in the global economy".  


A surprisingly strong set of Canadian employment data gave the Loonie a net 0.2% advantage over the USD. Payrolls went up by 106.5k in April, more than ten times the expected increase, and the rate of unemployment edged down to 5.7%, close to a 40-year low. The numbers were beyond investors' wildest expectations and the CAD reacted positively, rising 0.7% against the USD.  

Unfortunately for the Loonie, with the weekend looming and no follow-through buyers, half of that gain evaporated over the following three hours.  The correction made it a good day, rather than a great day, for the CAD.


It is arguable that the pound was treated unfairly on Friday. A good set of UK economic data made not the slightest difference to the currency's value, either at the time of their release or subsequently. As a result sterling is unchanged against the USD.

There were no UK ecostats this morning and no new developments on the Brexit front. Calls by Conservative party members for their leader to hand in her resignation have met with silence from Downing Street. Kier Starmer, a lieutenant of Labour party leader Jeremy Corbyn, has said a referendum will be essential to secure parliamentary support for any new Brexit deal but Mr Corbyn himself remains noncommittal. 


The JPY is almost 0.2% firmer against the USD, having covered a half-yen range three times. There was no indication that its gain had anything to do with market nervousness concerning trade: the NZ dollar had just as successful a day.  

It did not have anything to do with the Japanese economic data either.  Foreign reserves were fractionally higher at $1.294 trillion in April; the leading economic index softened from 97.1 to 96.3; the coincident index was down by a point at 99.6.

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