Dollar drops after big Tory victory and US-China trade deal
Scott Petruska, CFA " | December 13, 2019
The dollar dropped and risk assets soared following a combination of 1) a stunning victory by Boris Johnson and his Conservative party in UK’s general election, and 2) Trump’s approval of a ‘Phase One’ trade deal with China. The UK pound gapped higher on the election news, and the trade deal pushed all currencies higher against the dollar, as two key uncertainties plaguing the markets for months were effectively eliminated. Initially, big gains were made by risky assets: equities and currencies of most developed and emerging markets; and big losses were made by safe-haven assets: bonds, the US dollar, Japanese yen and gold. Much of those initial spikes in currency movements have reversed to some extent following a Trump tweet this morning about fake news related to the trade deal.
December 13, 2019
EUR/USD 1.1159 GBP/USD 1.3324 USD/CAD 1.3177 AUD/USD 0.6886 USD/JPY 109.35 USD/CNH 6.9934 USD/ILS 3.4824 USD/MXN 19.0321 USD/CHF 0.9831 USD/INR 70.8150
The dollar’s safe-haven status resulted in it being sold off as the big market uncertainties – Brexit and the US-China trade war – were hugely diminished in size. After the initial knee-jerk sell-off, the dollar made a decent recovery, as traders took profits amid the realization that there is still plenty of work to be done on both fronts: Brexit on January 31 and “Phase Two” of the US-China trade deal.GBP
The UK pound reached 18-month highs, just over $1.35, following news last night that the Conservative Party won an impressive majority in the UK general election. It gives the Prime Minister the mandate he needs to withdraw the UK from the European Union next month. After the initial spike higher, heavy profit-taking by FX traders pared gains in the GBP, and it now trades beneath $1.3350.EURThe euro soared by nearly a cent, from $1.11 to $1.12, following relief from the dual uncertainties of Brexit and the US-China trade deal. A down-correction in the euro was seen after French President Macron said he wants the EU to avoid “dumping” in the trade deal with the UK. Discussions begin in earnest following the January 31 Brexit and terms need to be agreed upon by end-of-year 2020.CAD
The Canadian dollar effectively played on the sidelines, while FX traders focused on the UK pound, euro and the US dollar following the UK election results and the US-China trade deal.ASIA/PACIFIC
The Chinese yuan made huge gains on news of a US-China trade deal. The USD/CNY dropped below the psychologically significant CNY 7 to USD, the first time in over a month. It already pared most of those gains after Trump’s tweet that the deal as reported by the Wall Street Journal was “completely wrong”. Traders await a press conference shortly by China’s information office.
The Japanese yen, an important safe-haven currency, collapsed following the UK election and US-China trade deal news. The USD/JPY currency pair jumped from 108.50 to near 110. It’s pared much of those loses over the last few hours amid the Trump tweet.