Investors are selling US dollars and we’d like to explain why. All of the major currencies traded higher against the greenback on Thursday with the exception of the Canadian dollars. There are no fewer than 5 reasons for the greenback’s weakness over the last 24 hours:
5 Reasons Why Traders are Selling US Dollars
1. Federal Reserve poised to cut rates this month
2. Iran seized a foreign tanker
3. US Treasury Secretary Mnuchin teases possible change in Dollar policy
4. Earnings disappointments drive stocks lower
5. USD/JPY closes in on 1 month lows
The backdrop should be one of US dollar weakness because the Federal Reserve is poised to lower interest rates this month. Although they may only grant us one rate cut in 2019, the mere fact that they are easing at all after raising interest rates in December marks a significant shift in monetary policy and the outlook for the economy. Investors are also worried about tensions in the Middle East after Iran seized a foreign oil tanker. If you recall, the US was close to striking Iran in June after an American drone was shot done over the Strait of Hormuz. Treasury Secretary Mnuchin teased the possible of a change in dollar policy this morning. He said there was no change in the country’s currency policy “for now,” which suggests that they could alter the government’s support for a strong dollar in the future as another way to tip the trade scales in the country’s favor. Earnings season is also in full swing and the results have been mediocre. Stocks are down 4 days in a row and its taking a toll on USD/JPY. Japan’s trade surplus didn’t help and leaves USD/JPY trading near its monthly low. Looking ahead we expect further losses with a possible test of June lows near 106.78.
The British pound and Australian dollar were the best performers. UK retail sales completely blew expectations, rising 1% in the month of June against a forecast for -0.3% decline. Spending excluding auto fuel was also very strong which means that underlying demand is robust. This increase sufficiently covered the declines in April and May and will ease concerns about the impact of lower business investment. Sterling traders were also encouraged by reports that the European Union may be open to an alternative backstop, which has been a pressure point for the two leading candidates for UK Prime Minister.
The Australian dollar was driven higher after the most recent labor market numbers.Although a mere 0.5K jobs were created in the month of June, the miss was due entirely to part time work. Full time jobs increased 21K, a solid rise that left the unemployment rate unchanged at 5.2%. The data could have been worse according to the PMIs, so investors were relieved. AUD/USD is hovering just under 3 month highs and could break higher in the coming days.
Last but not least, the Canadian dollar failed to participate in today’s rally because oil prices fell for the sixth day in a row. The price of crude tumbled towards $55 a barrel, its lowest level in nearly a month. Canadian retail sales are due for release tomorrow and investors are worried that given the Bank of Canada’s dovishness, we could see softer spending numbers. If the data is weak, it could finally mark a bottom for USD/CAD.