US Dollar Enjoys The Roller Coaster Ride On Trade

Hints from China that it wants to resolve the trade war have given a boost to risk assets but global growth fears persist. 

President Donald Trump shakes hands with Chinese President Xi Jinping during a meeting on the sidelines of the G-20 summit in Osaka, Japan

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USD: Dollar may stay bid on stabilizing front-end rates

Trade-related sentiment continues to be on a roller coaster, with the dollar (DXY is up 1% since last Friday) seemingly the only one enjoying the ride. The latest news hinted once again at easing tensions after the Chinese government indicated that there will be no immediate retaliation to the recent escalation. Nonetheless, a solution still appears quite far off and lingering fears of a global slowdown have been weighing on the ultra-sensitive Australian and New Zealand dollars overnight, prompting some safe-haven inflows and a rebound in the Japanese yen. Today, markets will be monitoring the July PCE core deflator (the Federal Reserve's preferred measure of inflation), with any sign of a more robust inflation backdrop likely prompting further stabilization in front-end rates. Notwithstanding any further development on the trade war, the dollar may stay bid across the board today and DXY could keep advancing towards early-August highs.

EUR: EUR/CHF may be set for a downward correction

Yesterday’s comments by the European Central Bank's Klass Knot – who argued against a new round of quantitative easing – had a very short-lived positive impact on the euro, proving insufficient to dent the markets’ ultra-dovish expectation for the upcoming ECB meeting. Such expectations were once again fuelled by weak data-flow as German inflation edged lower in August. Today’s eurozone-wide numbers are likely to reiterate the weak inflation story and possibly keep the euro on the back foot, in particular against the Swiss franc. EUR/CHF has been benefiting from a recovery in sentiment, both on the global trade side and on the Italian side, as the new PD-Five Star coalition boosted hopes of a less confrontational approach to budget discussions with the EU. With most of the positives priced in, the pair may be set for a downward correction in the coming days.

GBP: Calm before the storm?

After the jump in volatility on Wednesday, sterling has been trading range-bound across the board. This may continue to be the case today as investors might well opt for a wait-and-see approach ahead of a key week in the UK parliament. Plus, additional short positions on GBP may be partly offset by some profit-taking given the already extensively short speculative positioning on the pound.

CAD: Watch for fading growth momentum ahead of BoC

Today’s release of the GDP numbers (1330 BST) will be closely watched, given the proximity to the Bank of Canada meeting (next Wednesday). Our economists expect a strong 2Q reading (3.0% quarter-on-quarter, annualized), but markets may focus more on the June numbers which are instead likely to flag a loss of momentum. This may fuel expectations for a more dovish monetary stance by the BoC, thereby cementing the view that a rate cut will come by the end of 2019. In turn, USD/CAD may edge higher on the day, testing the 1.3314 200-day moving average.