JPY and Safe Havens Win, MXN Loses As Another Potential Trade War Front Opens

May 31, 2019 (Western Union Business Solutions)  – Trade tensions kicked into a higher gear Friday to the benefit of the yen and the detriment of the Mexican peso. America’s dollar was mixed but mostly subdued as losses of nearly 1% against the yen overshadowed new highs versus rivals from the U.K., Canada and Mexico. The euro ticked higher though its rise lacked conviction. President Trump threw another log on the fire of global risk aversion after he announced new tariffs on Mexican imports in a bid to stop migrants from crossing the southern border. The news heightened fears of aggressive trade policy slowing growth in the U.S. and globally, sending stocks and oil markets swooning, and investors ducking for cover in safer currencies like the yen, Swiss franc and greenback. A slew of U.S. data to close out the month could add to the rise in market volatility.

Euro scores a technical victory 

The euro largely treaded water as gains against sterling translated into general support. The euro’s ability to keep above support allowed for a technical victory. Still, bouts of euro strength have lacked conviction on account of the bloc’s underperforming economy and concerns about Italy, the euro zone’s debt-choked No. 3 economy. Next week looms large for the euro with big-ticket euro zone data Tuesday on inflation and unemployment which could serve as a preview to Thursday when the ECB issues as policy update. Weaker inflation would increase the risk of the ECB at least laying the ground work for another round of euro-negative stimulus.

Goodbye May, hello new lows

Sterling capped off one of its worst months in a year with a slide to fresh January lows against the greenback. Key support for the pound gave way, a reflection of growing fears of Britain crashing out of the EU without a trade agreement. GBPUSD is down about 3.4% this month, putting it on course for its worst month in about a year.

Peso tumbles to 2019 lows

Mexico’s peso crashed to 2019 lows after the outlook for the nation’s economy darkened after President Trump announced a new 5% tariff on everything that Mexico sends above the border. The risk-averse backdrop compounded the peso’s plunge with the Mexican currency down nearly 3% plunge to December 2018 lows against the greenback.

Yen soars to 4-month peaks

A nearly 1% surge in the yen drove it to four-month peaks against the greenback. The yen is the initially winner of America’s decision to announce new tariffs, this time on its southern neighbor. Global risk aversion sent U.S. Treasury yields to new lows, making the greenback a less appealing bet.

Loonie pares losses after data  

Canada’s dollar pared losses after it notched new five-month lows. Canada’s economy ticked higher during the first quarter but the 0.4% pace of annual growth, which followed a 0.3% rate in Q4, fell short of forecasts. While disappointing, it helped that March growth (0.5% vs expectations of 0.3%) proved stronger than expected and suggested the economy entered the second quarter with more momentum. The data largely fit with the view of faster second quarter growth. Oil down more than 2% and around $55 doesn’t bode well for commodity currencies.

Cool runnings: U.S. inflation

The dollar favored its back foot after tame U.S. inflation depicted an opening door to a Fed rate cut. Consumer incomes rose and their spending increased but inflation remained scant with core prices up an annual rate of 1.6% in April, several notches below the Fed’s 2% goal. While the dollar has outperformed and raced to two-year highs, the latest trade frictions carry a negative element for the greenback. The potential hit to U.S. growth from trade conflicts has the market increasingly convinced that the Fed may need to slash borrowing rates at least once this year to ward off recession risk.

 

 

 


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