With less than 48 hours to go before the beginning of the G20 Summit in Osaka Japan, the focus is shifting back to U.S.-China trade relations. This morning during the early European trading session, USD/JPY shot higher on reports that a trade deal between the U.S. and China is 90% done. Unfortunately the interview with U.S. Treasury Secretary Mnuchin was misquoted and instead of saying that it is 90% done, he actually said they "were about 90% of the way" there. In this case, tenses make all the difference because a deal that is close to being done is very different from an agreement that was almost done and abandoned near the end.

Regardless, the dollar gave back only a small portion of its gains as FX traders hold out hope for deal. At minimum, investors are hope that the trade talks will resume after this weekend's meeting between the 2 leaders. We think they will but President Trump is extremely difficult to predict. Today, he said he's optimistic about trade talks but he's "very happy with where we are now" and is still considering more tariffs. Based on these comments alone, it doesn't seem like the President is walking into the talks with a different attitude than before. So while USD/JPY has shot higher ahead of the G20 Summit, unless there is meaningful progress before the markets close on Friday, we expect to see profit taking.

Meanwhile the improvement in risk appetite drove all other major currencies higher today. The New Zealand dollar led the gains, rising to fresh 2-month highs. This may be surprising to many because the Reserve Bank said lower interest rates may be needed given downside risks. They felt that the global economic outlook has weakened and there is risk of ongoing subdued domestic demand. Softer house prices could also dampen spending while uncertainty weighs on business investment. NZD/USD fell immediately after the rate decision but recovered in minutes. The RBNZ's dovish tone was widely expected and no new revelations were made. Interest rate futures are pricing in a 66% chance of a cut in August and 79% chance in September which is a not much different than last week. Instead the immediate focus is on G20 and as a high beta currency, improvements in U.S. - China trade relations can be extremely positive for NZD.

USD/CAD dropped to its lowest level in 6 months on the back of oil. Crude prices rose more than 3% following a major refinery outage in the East Coast. Apparently the damage is so severe that it could permanently shut down the oldest and largest refinery in the region. The Canadian economy is also performing well compared to its peers. There was only one piece of data released so far this week and while it's a minor one, the increase in wholesale sales is indicative of broader demand. GDP numbers are scheduled for release on Friday and given low expectations, there's reasonable chance for an upside surprise. The next level of support in USD/CAD is 1.30.

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