Daily Market Update

Dollar Higher, Italy Safer, Trade Questionable

June 01, 2018

The U.S. Dollar closed the month of May over 2.0% stronger per the Bloomberg Dollar Spot Index.

USD

At the time of writing, the momentum in the greenback’s favor accelerated as the release of the employment Situation figures revealed a much better picture than expected in labor and wages. Non-Farm Payrolls increased by 223K in May versus 190K expected. Additionally, the Unemployment Rate fell to 3.8% from 3.9% and Average Hourly Earnings increased by 0.3%, which improved the yearly rate to 2.7% from 2.6%. Overall, the buck is indeed advancing and stands at its best moment since mid-December against its major counterparts.

It is clear that the dollar will continue to see swings as long as economic data propels it, but trade conflict fears halt its gains. The announcement of tariffs on metals on U.S. allies like the European Union and our neighbors have been met with some frustration and the much worrisome promise of countermeasures. Tensions are building as Treasury Secretary Steve Mnuchin experienced after receiving quite a cold welcome at the G-7 Summit.

The meeting is in Canada where Prime Minister Justin Trudeau stated that these unilateral tariffs are “unacceptable.” Thus far, the buck is not paying a toll, but Canadian Dollar and Mexican Peso surely are trading at their weakest levels since March for the former and mid-December for the latter.

 

EUR

The shared currency remains under pressure although a government was finally formed in Italy. After a week of rejection, confusion, and redemption President Sergio Mattarella agreed to a cabinet, which includes Giuseppe Conte as Prime Minister, again after he had quit, and the controversial Paolo Savona as Minister of European Affairs instead of Finance Minister. Mr. Savona had been rejected by the President last week as the coalition’s choice for finance because he is a well-known Eurosceptic who advocates for an alternative to the Euro.

Regardless, the populists now have a functioning line-up and while their spending proposals may scare EU officials, the markets have accepted that this formed alliance will not immediately do something to separate from the European Union. Meanwhile in Spain, Manuel Rajoy was ousted as Prime Minister after a no-confidence vote in congress.

Pedro Sanchez will be the new leader after multiple parties agreed to push Rajoy who is accused of corruption and poor management of the Catalan call form independence last year. Data-wise, the Euro may prevent further losses as Purchasing Managers Index figures met expectations of expansion.

 

MXN

The Mexican Peso lost 6.5% of its value in May after a month that threatened the established Trade order. NAFTA negotiations, held in private, have given no hope of a healthy revamp, which now multiple officials are admitting to. Furthermore, the deadline for tariffs on metals was certainly a hit as the government now promises to retaliate by adding costs to all U.S. products from cheese to machinery.

Unfortunately, we see no quick solution, but this year has been full of surprises. Counter-measures will need to be assessed, but all across the globe the decision to impose tariffs on countries that are our friends has caused stock indexes to fall dramatically.

 

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