July 2019



• “The Federal Reserve’s dovish turn in June caused the trade-weighted U.S. dollar to register its first decline in five months. It’s unclear, however, if rate cuts would hurt the U.S. dollar all that much. If the Fed opts for a cut of 50 basis points or lower this year, that could cause the greenback to appreciate rather than depreciate because such action would fall short of market expectations of a 75 bp decrease by the end of the year. Even a 75 bp rate cut or more may not necessarily punish the USD if the stimulus is coming in the context of heightened concerns about the global economic outlook which may instead boost the greenback via safe haven flows. For now, our base-case scenario is one where the U.S. and China agree to at least a truce in their ongoing trade war, something that’s likely to brighten global economic prospects somewhat. The resulting risk-on sentiment may somewhat weigh on the greenback, which explain sour call for USD softness to persist over the near term.”

• “Benefiting from USD weakness, the euro managed to register gains against the greenback for the first time in five months, and that despite soft economic data in the eurozone. Things are unlikely to get easier in the second half of 2019 with Brexit scheduled for October and potential U.S. tariffs on autos in November. So, while the euro could appreciate some more amid USD weakness over the near term, we don’t see alot of upside for the common currency.”

• “Thanks to June’s surge, the Canadian dollar is the best performing major currency so far this year. Higher oil prices and narrowing Canada-U.S. differentials, courtesy ofthe Fed’s dovish turn and better-than-expected Canadian economic data, are lifting the loonie. There is room for those two drivers to push USDCAD below 1.30 this summer. We, however, acknowledge risks the loonie may head the otherway, i.e. depreciate versus USD should the global economic outlook darken, via say an escalation of trade protectionism.”

*** This extract from Economics and Strategy, Highlights, National Bank, Financial Market, July 2019.

Stéfane Marion

Chief Economist and Strategist

Krishen Rangasamy

Senior Economist

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