With price pressures still running at a subdued level throughout the developed world, hotter-than-expected inflation readings have been hard to come by of late. Perhaps today’s Canadian inflation data marks a turning point for that trend.
The Dollar Index retreated from its 2018 peak of 96.98 following news that China will resume trade talks with the United States later this month. The news allowed the Yuan and other emerging market currencies to rally after a steep selloff led by the Turkish crisis and ongoing trade tensions.
Technically speaking, the dollar index formed a clear “ascending triangle” pattern through May, June and July. The bullish breakout from that pattern, in-line with the recent uptrend, suggests that rates may have further to rally in the days and weeks to come.
Pound bulls hoping to see a big beat on the July inflation numbers were left disappointed, as the data merely met expectations. Although off its lows, sterling remained under pressure after breaking the $1.27 handle overnight following yesterday’s news of weaker-than-expected growth in wages, and amid ongoing concerns over a no-deal Brexit outcome.
Once again, the market is taking it personally. How many times have come here in the past year and a half playing Lord Rothschild to warn you we are dealing with a similar market from the late 30’s? What happened was I’ve been talking about it a lot longer but Rothschild went public so it gave the rest of us who are awake a lot of credibility. Still, the market went higher.
Another week has flown by and what a disastrous one it has been for the likes of the Turkish lira and to a lesser degree the British pound, but once again it has been a good for the US dollar. Next week should be equally exciting as there are a few important data releases to look forward to, while the ongoing situation in Turkey could bring about further volatility – not just for the lira but the stock markets too.
The U.S. dollar appreciated versus most major pairs on Friday. The Japanese yen outperformed the greenback as a safe haven, but all other major currencies suffered heavy losses during the week. Tense trade developments between China and the United States and Friday’s drop in the Turkish lira dragged emerging and developed markets lower as US sanctions were doubled.
The economic situation in Turkey has been a powder keg for months, and it’s finally found a spark. While investors have never truly trusted Turkish President Recep Tayyip Erdogan, he’s shredded his last vestiges of credibility in recent months by appointing his son-in-law as the country’s finance minister and espousing his belief that lower interest rates were needed to fight inflation, the exact opposite of economic orthodoxy (and your humble author would argue, all the empirical evidence of centuries of central banking); indeed, Erdogan recently stated, “interest rates are the mother and father of all evil."
After a sharp slide, the pound has finally caught a bid today. While it is too early to suggest that a low has been hit, today’s rebound is certainly a welcome relief for the pound bulls. The British pound/U.S. dollar (GBP/USD) currency pair has ended a run of five consecutive losses, the GBP/JPY is up after falling six days in a row, while the euro/British pound (EUR/GBP) is back below 0.90 after a sharp four-day rally.