Global Themes

The U.S. dollar ran into a wall of worry that had it broadly weaker Friday but still clinging to a narrow weekly gain. Turmoil that has engulfed the White House has taken a renewed toll on the dollar. Among the concerns is that President’s top economic adviser Gary Cohn could resign in the wake of the White House’s reaction to the deadly protests in Charlottesville last weekend. Mr. Cohn is considered the architect of the president’s fiscal agenda, particularly tax reform, and said to be in the running to lead the Federal Reserve after Janet Yellen’s term ends in February. With political uncetainty dominating, it’s caused the dollar to surrender the better part of a data-inspired rally to multiweek highs. The dollar shed a quarter- and half-percent against its Canadian and Japanese rivals, and was mildly weaker versus the euro and sterling. Canada’s dollar could have a major reaction to the nation’s inflation report today.

GBP

Sterling firmed Friday but was still on pace for a nearly two-cent weekly decline against the dollar. The pound hit a five-week low this week after U.K. inflation undershot expectations and weakened an already questionable case for the Bank of England to raise interest rates this year. The pound pared its losses, though, as U.S. political uncertainty caused the dollar to squander the better part of a data-induced rally to multiweek peaks. Underlying pound sentiment remains wobbly on the view that the U.K. economy could spend several quarters stuck in a low gear as Brexit uncertainty weighs. U.K. data on Aug 24 is forecast to confirm the world’s No. 5 economy grew at a subpar 0.3% rate during the second quarter.

JPY

The safe harbor yen was the highest flier Friday, hitting one-week peaks against the dollar, as markets found a cocktail of concerns in U.S. political uncertainty and the deadly attack in Barcelona. The yen tends to thrive during risk-averse times given how its low-yield (-0.10%) leaves it prone to be using as a funding currency for bets on higher yielding currencies, like the greenback and Aussie and kiwi dollars, during risk-on periods when market confidence brightens. When optimism diminishes the so-called carry trade gets shifted into reverse, leading the market to ditch yield for safety. 

EUR

The euro was a smidge higher against the dollar, paring weekly declines, as U.S. political uncertainty overshadowed ECB concerns about the single currency’s economy-squeezing surge of more than 11% this year. If not for the dark clouds over the White House, the euro might be lower after minutes from the last ECB meeting, released Thursday, acknowledged euro strength as a threat to the bloc’s economic revival that has many expecting the central bank to scale back stimulus. While meaningful upside in the euro could be capped over the short run, moves to the downside could also prove limited given the political pressure dogging the dollar. Next week brings key investor and business sentiment surveys from Germany on Tuesday and Friday, respectively, and ECB chief Draghi’s speak at the Fed’s Jackson Hole, Wyo. Symposium on Aug 24-26.

USD

The dollar was subdued Friday but still on track to squeak by with a weekly gain. Evidence of big corporate America losing confidence in President Trump has overwhelmed a run of good news this week on the U.S. economy that showed the strongest consumer spending all year. The dollar’s rally to three-week peaks deflated some as political turmoil engulfed the White House, casting more doubt on the president’s economy-boosting agenda, and dovish minutes from the last Fed meeting suggested a higher bar to another dollar-positive rate hike this year. For the dollar to break free of its political shackles, it would need favorable U.S. fundamentals to rise to the surface. Next week brings the Fed’s annual Jackson Hole, Wyo. conference of global central bankers on Aug 24-26. Fed chair Janet Yellen will speak. The dollar could find support if Ms. Yellen should telegraph coming policy changes such as a shrinking balance sheet and higher interest rates. 

CAD

Canada’s dollar strengthened towards two-week peaks after north of the border inflation rebounded from 20-month lows, smoothing the path for the Bank of Canada to raise interest rates from 0.75% as soon as October. As expected, inflation improved to 1.2% annually in July from 1.0%, which was the coolest in nearly two years. Come next week, the focus will be on the Canadian consumer with a report on retail spending on Aug. 22. Higher oil markets added to the tailwinds on the Canadian currency which could soon see USDCAD take aim at support. 

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