Oil rebounded from the previous session. WTI jumped 2.9 percent and Brent 2.61 percent with a combination of a weaker US dollar and signs that a deal with Mexico to at least delay tariffs could be close.
Crude remains flat on a weekly basis as trade disputes have been offset with central banks signalling that rates will remain low, or in the case of the Fed reverse their monetary policy to avoid the economy falling in to a recession.
The surprise buildup of 6.8 million barrels of crude and 3.2 million barrels of gasoline put downward pressure on energy prices on Wednesday which combined with the negative effect of a prolonged trade war with China have on crude prices.
GOLD – Gold Rises on Soft Dollar as US Rate Cut Narrative Gather Momentum
Gold rose 0.45 percent on Thursday as the Fed keeps signalling a rate cut could be near. The White House went from reopening a trade front and reducing the appeal of the US dollar as a safe haven. Gold was higher, despite comments in the afternoon that a delay could be announced as talks between the US and Mexico continue.
Central banks remain committed to avoiding a recession. The Fed hiked four times in 2018 and has almost gone full 180 degrees after a hard stop in January. Now Fed members keep dropping hints about a potential rate cut if it’s needed to stabilize the economy. The European Central Bank (ECB)
Issued a similar statement as he is ready to use all instruments to support the economy.
Gold has remained above the $1,330 level thanks to the ramp up in trade war rhetoric from the US. The market does not expect a long dispute with Mexico as talks appear to be near an agreement. Talks with China have taken a backseat, but as the two sides are far apart and with an upcoming G20 meeting at the end of the month there could be good news. Then again, we have been here before, where an agreement was within reach, only to be snatched away at the last second.
The yellow metal is a preferred destination for investors that seek refuge from uncertainty, especially if the US is battling in more than one trade front. As trade concerns ease there will be less appetite for a safe haven.
STOCKS – Equities Rally on Mexico Tariff Hopes
A report that US officials could announce a delay on Mexican import tariffs boosted equities on Thursday trading. President Trump has said that progress has been made, but not enough prompting markets to price in delay as the most likely scenario. The US is asking Mexico to keep Central American migrants during their asylum-seeking proceedings.
The auto sector was one of the hardest hit due to the integration of the production between the two nations, so it was understandable that it rebounded on positive US-Mexico news. The market continues to be sensitive to trade war rhetoric. The US-China dispute will drag on, with the next round of talks unclear, with a chance of a meeting of the two leaders in Japan as part of the G20 at the end of June.
Trump continues to beat the trade war drum, announcing that tariffs against China could rise $300 billion if necessary. Equities had put China in the back burner until more details emerged, but the Mexico trade spat once again highlighted the perceived negative impact that a prolonged trade will can have on the global economy.
FX CAD – Loonie Higher on Narrow Trade Deficit and Soft Dollar
The Canadian dollar rose against the US dollar by 0.37 percent on Thursday. The loonie appreciated on the back of a softer dollar and rising commodity prices. The market keeps piling on higher probabilities that an interest rate cut by the U.S. Federal Reserve will come sooner rather than later.
Trade data showed the Canadian trade deficit shrunk by more than expected. Rising exports and falling imports are a positive sign for the economy. Employment data is up next. The spotlight will be on the US jobs report published at the same time, but a small gain in Canada is expected. The monster 106,500 job creation will not be replicated, but as long as Canada keeps adding jobs the loonie could withstand a rise from the US dollar.
An interest cut by the US central bank is getting closer as Fed speaker after Fed speaker issues remarks.
FX EUR – Euro Rises as ECB Doesn’t Go Full Dove
The US dollar was lower across the broad with the euro rising 0.48 percent against the greenback. While an interest rate cut is being pricing in against the US dollar, the euro got a pass from the ECB that did not include the monetary policy option as part of the available tools that it could use. The fact that the ECB upgraded economic growth and inflation forecasts higher was not as dovish as Fed remarks have been recently. The central bank did extend the period it expects to keep interest rates unchanged until the first half of 2020.
Economic indicators in Europe have been mixed with manufacturing in contraction. The German economy in particular has not regained enough momentum to bring up European manufacturing to an expansion.
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Alfonso Esparza Senior Market Analyst, Toronto at OANDA
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Melinda Earsdon Global Head of Public Relations at OANDA
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