Renewed Trade Talks, Easing of Contagion Fears Soften Dollar’s Bullish Performance

Two stories dominated the Forex news last week:  financial turmoil in Turkey and the announcement of renewed trade talks between the United States and China. In between was a slew of domestic and foreign economic data.

Primarily driving the price action early in the week was risk aversion with fears of Turkish contagion weighing on risky assets. A plunge in the Turkish Lira and concerns over China’s economic health also hit emerging market currencies, boosting the dollar.

The situation in Turkey appears to be manageable compared to a week ago, nonetheless, the Lira snapped a three-day rebound on Friday, falling more than 5 percent against the dollar on worries about the threat of more U.S. sanctions unless Turkey hands over detained American evangelical pastor Andrew Brunson.

Heading into the week-end, investors also appeared more optimistic that next week’s lower-level trade talks between China and the United States offer some hope that the two countries will find a way to head off a full-blown trade war.

In other news, U.S. Core Retail Sales rose 0.6% in July, beating the 0.3% estimate. However, June’s reading was revised lower to 0.2%. Retail Sales climbed 0.5% versus 0.1%. The previous report was revised down to 0.2%.

Minor reports were mixed with the Empire State Manufacturing Index coming in at 25.6, well-above expectations. Building Permits were flat. However, missing the mark last month and coming in lower were Housing Starts, the Philly Fed Manufacturing Index and Preliminary University of Michigan Consumer Sentiment.

Australian Dollar

Australia’s jobs report missed expectations in July. Total employment in Australia fell by around 3,900 in July in seasonally adjusted data, missing forecasts for a gain of 15,000.

Despite the drop in the headline number, the unemployment rate edged to the lowest level since 2012, due to a decline in the labor force participation rate.

The mixed report should not encourage the Reserve Bank of Australia to change policy. It’s still not likely to make a move until late 2019 or 2020. While the report shows that the underlying health of Australia’s labor market is still strong, a return to higher wage growth still looks a long way off.

Japanese Yen

The Dollar/Yen struggled all week to reverse its two-week decline, with lower Treasury yields and aversion to risk continuing to drive investors into the Japanese Yen. Also helping to pressure the USD/JPY was the prospect of stronger rates of inflation pushing the Bank of Japan away from its ultra-loose monetary policy.