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Canadian dollar update – Tuesday July 21, 2020. USD falls on stupidly high deficits, stimulus spending & COVID-19 resurgence.

FX & market recap:

EU leaders are bumping elbows and proclaiming what wonderful statesmen they are. Not only did the 27 EU leaders manage to agree on a €1.824 trillion, 2021-2027 budget, €750 billion of it was the highly touted COVID-19 Relief Fund.

The Relief Fund is watered down, consisting of €390 billion in grants rather than the €500 billion proposed initially, and €360 billion of low-interest loans. The EU added a tax on non-recycled plastic which goes directly to the EU and not member countries. There are plans to tax on imported goods from countries with lower carbon emissions than the EU and maybe a tax on financial transactions. Nothing boosts a struggling economy like more taxes.

Canadian dollar highlights:

USD/CAD went along for the ride as with most currencies. Prices dropped to 1.3474 in early NY trading after peaking at 1.3535 overnight, with bearish US dollar sentiment and positive risk sentiment driving the down move. Canada Retail Sales is expected to rise 20.0% in May but should not have any impact on USD/CAD trading. Oil and Gold prices climbed on the back of US dollar weakness. WTI gains are capped by concerns that supply will continue to outstrip demand.

Euro highlights:

EUR/USD jumped to 1.1469 from 1.1436 on the back of the news, then dropped to 1.1424. The rally resumed in early NY trading with EUR/USD touching 1.4555 as of 6:25 am ET. Some analysts expect further EUR/USD gains. They suggest that the run-up to the EU budget/debt deal acted as a drag on EUR/USD upside. With that out of the way, the single currency is free to rally, as US problems come to the forefront. Those problems include stupidly high budget deficits, with more stimulus spending in the pipeline, and extremely low US interest rates which make US assets less attractive. The resurgence of US COVID-19 cases, in part because of Donald Trump’s leadership, and the upcoming election, are other reasons to avoid the greenback.

British pound highlights:

GBP/USD rallied with the improved risk sentiment tone, surging Euro area equity indexes, and hopes of progress in UK/EU trade talks, which start anew next week. Plans for another US stimulus package also supported prices, as did hopes for a COVID-19 vaccine, which led to broad US dollar selling.

Asia Pacific highlights:

USD/JPY traded sideways in a 107.14-36 range but is mildly bid above 106.60, looking for further gains toward 108.30. Meanwhile, AUD/USD and NZD/USD jumped aboard the rally wagon. AUD/USD was supported by the RBA minutes. The minutes said that there was “no case for intervening in FX markets due to “limited effectiveness,” and when the rate is ”broadly aligned with its fundamentals."

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