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USD Pauses On PBOC's New Reserve Ratio Requirement

By Ashraf LaidiMarket OverviewAug 03, 2018 08:47AM ET
www.investing.com/analysis/usd-pauses-on-pboc-pre-nfp-200336126
USD Pauses On PBOC's New Reserve Ratio Requirement
By Ashraf Laidi   |  Aug 03, 2018 08:47AM ET
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In the latest piece of evidence that the USD strength has been mainly a result of the Chinese yuan, US dollar is now falling across the board following the announcement (12:18 pm London Time) from the People's Bank of China to begin requiring clients a reserve ratio of 20% on currency forwards. The decision is aimed at stabilizing recent volatility from trade frictions. FX saw broad strength in the US dollar over the last 12 hours but the Canadian dollar remains on top -- the best performing currency of the last 5 days and of the last 4 weeks on continuous data robustness from Canada. Most of all, prolonged optimism on the NAFTA front has been the most direct booster to the loonie.

USD Week Chart
USD Week Chart

The cloud over the loonie at the moment is the NAFTA agreement but signs have undoubtedly improved. Yet the market is unwilling to give the Canadian dollar credit because of the whimsical nature of White House negotiations. If a deal is struck, the market may take another look at Canadian fundamentals and find reasons to cheer. Recent numbers on retail sales, CPI and GDP have been glowing.

On the flipside commodity prices aren't as strong as they appear. Today the spread between US oil and Western Canada Select hit the widest since 2013 at almost $31. Lumber, another major Canadian export, is down 45% since May. Industrial metals are around 15% down from the highs of a month ago and precious metals remain beaten down. One spot to watch is LNG, where Canada may get some inbound investment.

In any case, the day ahead is likely to be about the US side of the equation with non-farm payrolls due. Wages will once again be the market driver with the consensus at +0.3% m/m.

USD Pauses On PBOC's New Reserve Ratio Requirement
 
USD Pauses On PBOC's New Reserve Ratio Requirement

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