US dollar sell-off moderates; trade tensions back into focus

UK prepares list of businesses for July 4 reopening

KUWAIT: The US dollar’s performance last week continued to be driven mainly by the day-to-day fluctuations in investor risk sentiment. However, the dollar sell-off that began mid-May seemed to have flattened out with a more balanced risk appetite from market participants given some renewed evidence of further COVID-19 spreading.

The US dollar softened at the start of the week alongside a modest improvement in investor risk sentiment as fears over the COVID-19 outbreak in Beijing had eased. The move was short-lived as trade policy uncertainty was thrust back into focus on comments from a White House advisor. In an interview, the advisor implied that the phase one China trade deal was “over.” However, President Trump moved quickly to debunk the statement by tweeting that

“the China trade deal is fully intact. At the same time, it was reported that the US is weighing up imposing new tariffs on $3.1 billion of imports from the EU including products like olives, alcohol and trucks while also increasing existing tariff rates on other products like aircrafts, cheese and yoghurt. The move from the Trump administration is a continuation of the EU’s “punishment” for providing illegal subsidies to Airbus. The tariffs are expected to come into effect in September if the US decides to go ahead. At which point, the WTO is also expected to determine if the EU can legally impose tariffs on $11.2 billion of US imports in retaliation for similar illegal subsidies provided to US’s Boeing. Renewed trade tensions threaten to undermine the economic recovery and the reaction seen highlighted the FX market’s continued sensitivity to trade policy uncertainty.

Partially supported by fresh trade uncertainty, the US dollar moved higher towards the end of the week as COVID fears in the US were rekindled. The spread of the virus continued in multiple states across the country while others such as New York and New Jersey imposed 14-day quarantines for incoming travelers from eight states. If one message can be seen in last week’s volatile FX activity, it is a more challenging environment for risk assets which may see the dollar’s sell-off moderate. Indeed, most global stocks were lower while the move towards treasuries was evident. Going forward however, the US dollar’s performance will continue to be driven by fluctuations in risk-off/risk-on sentiment until the COVID shock fades and there is more clarity over the outlook for the global economy.

Economic data

US data released last week continues to project a slow recovery in the world’s largest economy. The number of Americans filing claims for unemployment benefits fell moderately as a second wave of layoffs partially offset hiring by businesses reopening. Furthermore, while orders for key capital goods rebounded in May, the increase recouped only a fraction of the prior declines. The recovery expected from reopening regional economies is currently being hampered by the labor market. While the figures seem to be improving, high unemployment is undercutting demand slowing the process. Economists expect GDP could shrink at as much as an annualized

46 percent in the second quarter.

ECB minutes

The ECB was under close monitoring last week as market participants carefully went through the minutes of the Central Bank’s last meeting. First, there was the increase of the new Pandemic Emergency Purchase Program stimulus and second, a response to the German constitutional court controversy from May.

The minutes suggested that an increase in stimulus was warranted by two main factors. One, the medium-term outlook for price stability was threatened by the fallout from the coronavirus crisis. New projections see 0.3 percent and 0.6 percent downward revisions in the 2022 headline and core inflation rates respectively. And two, financial conditions for the euro area as a whole were significantly tighter compared with the period before the pandemic, whereas the growth and inflation outlook called for looser financial conditions.

In May, the German constitutional court ruled that the ECB overstepped its mandate with over two trillion euros of government bond purchases and ordered the German federal bank—The Bundesbank should stop participating. In response, the minutes showed that ECB council members debated the effectiveness of their monetary policy. In the end, the ECB said there was “broad agreement” that the “negative side effects had been clearly outweighed by the positive effects of asset purchases on the economy in the pursuit of price stability”.

To further ease and resolve the standoff with Germany’s court, the ECB agreed to give unpublished documents underpinning its policy decisions to Bundesbank chief Jens Weidmann. Weidmann can then present them to the German parliament and government, as demanded by the court ruling. Most sources, expect that this would be sufficient enough for the Bundesbank to defend the ECB’s policy in court. Still, the ECB revealed contingency plans should the court rule against its favor. In this worst-case scenario, the ECB would launch an unprecedented legal action against the German central bank, its biggest shareholder, to bring it back into the program.

UK eases restrictions

The British pound was relatively stable last week in comparison to its counterparts supported by euro weakness and further easing of COVID restrictions. UK Prime Minister Boris Johnson revealed a list of eighteen businesses and venues including restaurants, bars, and places of worship that can reopen from July 4. Also, people will be able to meet and gather with friends and family more easily outdoors. However, fears of a second wave of infections and Brexit uncertainties kept the pound in check.

EU Brexit Michel Barnier negotiator voiced his frustration with the UK saying London needs to give “clear signals” that it is ready to work towards a resolution. “I believe that the deal is still possible,” he said, but “Our problem is not related to timing, but to substance, in particular that the UK keeps backtracking on its commitments in the political declaration.” While it is reassuring that the EU believes a deal can be made, the possibility of a failure still weighs heavily on the pound.

Oil & gold prices

Oil prices inched lower at the end of the week but remained supported above the $40 level as signs of fuel demand recovery was kept in check by a rising number of new coronavirus cases in the US and China. Analysts said satellite data showing a strong pick-up in traffic in China, Europe and across the United States pointed to an improvement in fuel demand. However, the prospect of increased US crude production also kept a lid on gains Friday. The recovery in oil prices makes some shale oil wells profitable again with larger producers reopening, increasing supply.

Gold prices hit a fresh eight year high last week heading for a third weekly gain on worries about rising coronavirus infections worldwide. Low interest rates and fresh money from stimulus measures are currently benefiting gold, which is viewed as a hedge against inflation and currency devaluation.

Kuwait

Kuwaiti dinar at 0.30770

The USDKWD closed last week at 0.30770.