After all of this week’s conflicting headlines, the only real truth is that President Trump isn’t ready to back down on his trade war with China. There’s no doubt that China wants the tariffs canceled and on Thursday it seemed as if both sides want to include that in the phase one trade deal. However on Friday, Trump made it clear that nothing has been decided – he said that while China wants the US to roll back tariffs, he hasn’t agreed to them. This suggests that even though the US and China hope to have a deal on paper next week negotiations aren’t going as well as the market had thought. All of the Japanese Yen crosses tumbled in response including USD/JPY. High beta currencies like the Australian and New Zealand extended their slide with the Canadian dollar and euro trailing not far behind. The winds could still shift in right direction because the US could offer China a partial and not full reversal of tariffs. This gesture of goodwill could be enough to satisfy the market and sustain the rally in equities and currencies. Its no secret that President Trump keeps a close eye on stocks and in many ways, consumers do so as well. With equities hitting record highs, the University of Michigan reported improvement in consumer sentiment. We’ll get a better look at how the US economy is performing with next week’s inflation and retail sales reports. We are looking for firmer numbers but nothing matters more than US-China trade developments. If a trade agreement is finalized next week, currencies and equities will soar, particularly if it includes delay or elimination of the December 15th tariffs. However, if the Chinese or Americans cast doubt on progress, the major currencies will extend their slide.

The outlook for the New Zealand dollar is particularly grim. This week’s softer labor market numbers and ongoing trade uncertainty boosted the odds of an interest rate cut by the Reserve Bank to 64%. Even if the RBNZ leaves rates unchanged, their outlook will gloomy as they leave the door wide open to an early 2020 cut. Given the level of uncertainty in the global economy, the actions taken by the RBA, recent NZ data and the fact that this is the RBNZ’s last meeting of the year, there’s a very good chance they will decide to bring rates down to match Australia’s 0.75% level. The Australian and Canadian dollars also ended the week with losses.

USD/CAD closed above 1.32 for the first time in 3 weeks on the back of weaker labor market numbers. Economists were looking for job growth to slow from 53K to 15K but Canada reported job losses of -1.8K. Not only was this much worse than expected but all of the jobs lost were full time. Although wage growth accelerated, today’s report validates the Bank of Canada’s somber mood and boosted the chance of a rate cut before the end of the year.

Euro sold off every day this past week against the US dollar. Data hasn’t been terrible including German trade and current account numbers, which showed a significant improvement. Exports increased 1.5% while imports rose 1.3%. Unfortunately, Q3 GDP numbers are scheduled for release next week and the data is widely expected to confirm that the German economy fell into recession in the third quarter. The government believes that any downturn will be short-lived and therefore fiscal stimulus is unnecessary. Either way, the near term outlook for euro is grim and the uncertainty is high with the US poised to make a decision on auto tariffs.

Last but certainly not least, Brexit risks may have abated but the risks to the economy hasn’t. Although most recent economic reports including PMIs were better than expected, the Bank of England cut their GDP and inflation forecasts. We’ll learn more about how the UK economy is doing with Q3 GDP, industrial production, trade, retail sales, CPI and employment numbers scheduled for release next week. It will be a very busy week for GBP and the risk is to the downside.