WEEKLY REVIEW: 4th September 2017
THE WEEK AHEAD
Market moving numbers: 4th September – 8th September 2017:
This second week of the start of the month comes with a slightly different narrative (compared to the usual which tends to be more technical) as it is filled with some substantial fundamental data releases; mainly pertaining Interest Rates. This week, we stand to witness Interest Rate decisions from three currency major economies namely Australia, Canada, and Europe; all presenting some chance for a more positive narrative or even a potential Interest Rate hike. In addition for the week, there are two major dissonances the team here at EssenceFX would like to pick out; one political and another regulatory, which we think could translate into much added volatility for the week.
Prior to drilling down deeper and to recap a little on what transpired last week; we witnessed a slightly less bullish August 2017 Nonfarm Payrolls release recording at 156k (Forecast: 180k). Nonetheless, hopes still linger for a third United States (U.S) Federal Open Market Committee (FOMC) Interest Rate hike to take place sometime towards the end of the year with the overall NFP continuing to average at a pretty decent level. This week, the team at EssenceFX opine that this could turn out to be a pretty exciting and volatile week (potentially outweighing the volatility presented in last week's NFP) as the markets eagerly await on these mentioned Interest Rate decisions which is sure to spark major volatility; specially in the event of any Interest Rate hikes.
Out of these three anticipated major Interest Rate decisions, the currency pair which interest us the most for the week would be the EUR. The team here at EssenceFX notes that the EUR/USD at least, has already tested the strong psychological 1.20 top level last week and continues to show potential to retest this level again. The European Central Bank (ECB) presents the highest chance for an Interest Rate hike to take place out of the three major Interest Rate decisions to take place this week. Whether it would turn out to be more of a "buy on rumour sell on fact" scenario or a strong continuation of an uptrend to break past the once tested 1.20 level is still yet to be known. One thing for sure is, the team at EssenceFX expects much volatility on release date and hence, would like to caution our fellow readers to manage your risk accordingly.
Falling second in ranks of importance in our opinion would be the Canadian Interest Rate decision. The Bank of Canada (BoC) is set to release their Interest Rate Decision sometime midweek. The team here at EssenceFX would like to point out to our readers that the BoC has already increased Interest Rates once this year on July 2017 and a potential continuity of an Interest Rate increase upon this meet up signals solid strength of the health of the Canadian economy. In terms of movement, the Canadian Dollar could easily rank as one of the top; if not the top currency performer this year. The team here at EssenceFX views that an Interest Rate hike or at least, a strongly bullish BoC statement could well bring the USD/CAD to well test the psychological 1.20 level.
Finally, falling behind in the Interest Rate hike scenario in regards to our forecast this week would be the Austrialian Dollar. The Reserve Bank of Australia (RBA) commented on their worries for a strengthening Australian Dollar and dropped quite a harsh comment on not favoring any Interest Rate hikes this year. The team here at EssenceFX views that the RBA will very likely continue to build on this narrative further during this meet up. High levels of household debt continues to remain as an issue in the Australia economy; specifically, concerns about the high levels of leverage brought about by rising asset prices during a period of low interest rates. This leads us at EssenceFX to view that given the opportunity to carry trade in other more promising currency pairs as well as the current narrative in play by the RBA, we view the Australian Dollar to remain under pressure over the near term. Nonetheless, the team here at EssenceFX remains bullish on the AUD over the longer term given certain major factors as discussed before here.
On a less exciting note, the Japanese are set to release their Second Quarter of 2017 Gross Domestic Product (GDP) sometime towards the end of the week. However, due to the escalating tensions between North Korea which threatens the status of the currency as a preferred safe haven, we expect some choppy trade to take place. The team here at EssenceFX favours not trading the Japanese Yen during periods of such uncertainty due to the potential unusual eratic movements it might bring which goes against it's usual personality.
In regards to global politics, the highlight for the week in our opinion would be North Korea's decision to launch a missle over Japan right into the Japanese sea. Translated into financial relevance, this drove markets crazy; spiking the demand for safe havens assets, propelling gold well above the 1,300 level. The escalating political tensions has sparked much safe haven demand as of late. China continues to remain less verbal in regards to matters pertaining North Korea. Formerly U.S President Donald Trump expressed his dissatisfaction towards China over their inability to curb North Korea's nuclear ambitions. This comes in response after reports indicated that the North Korean economy recorded it's highest GDP growth in 17 years despite ongoing sanctions; speculatively largely attributed towards their dealings with China. In regards to this, what's also interesting to note is that while 18 countries wanted a strong statement on the intercontinental ballistic missile test launched by North Korea, two countries namely, Russia and China found it unnecessary for North Korea to provide an explanation. Trade between China and North Korea grew almost 40% in the first quarter. Coincidence or not? We shall let you decide.
In addition to that, safe haven demand was also bolstered by a very heavy blow to cryptocurrencies; Chinese regulators have started a campaign to ban initial coin offerings (ICO) in the country. Bitcoin in particular, has proved to be a popular financial transfer vessel since China's strict regulation on capital outflows. This move follows as a result of pressure the Chinese regulators are facing to keep the local currency stable.
In relation to our highlighted 'populist movement' and the psychological effects it continues to bring upon our modern day society, the team here at EssenceFX would like to reiterate based on what happened in the recent United Kingdom (U.K) elections; there are a large mass of U.K citizens which demand for a change of leadership in the country. With U.K as a precedent, it intrigues us when we anticipate the possibilities and surprises the upcoming German Elections might bring, set to take place on the 24th of September 2017, this month. Nonetheless for the case of the Europeans, a recent update the team of us views as pertinent to the strength of the Euro is that the French Finance Minister Bruno Le Maire stated that he wanted to create a single economic zone to “rival China and the US” as many countries on the continent emerge economically. In our view, the “deepening of economic and monetary union” objective is a difficult one to achieve as there is much public opposition to the idea of a superstate. Nonetheless, deepening global competitiveness as well as positive numbers out of Europe as of late could ignite some fresh considerations in regards to the matter.
For the case of safe havens, gold moved up even further (after testing a crucial support level) this week amidst the mentioned political tensions and China's regulatory decision. However, several recent developments have caused us to reassess our take on safe havens for one; the recent announcement of blockchain moving into the financial mainstream with IBM's dealings with certain European banks and the continued hype in cryptocurrency with more mainstream players jumping in especially post heavier support from colossal entities such as the International Monetary Fund (IMF). In some instances, it does lead us to question whether the IMF 'intentionally' offloaded so much of their holdings of gold onto China. Nonetheless, the team will continue to closely monitor the developments of competing Gen Z favouring currency alternatives vis-a-vis the typical age long established Gen X favoured safe havens to provide you with a better overview. For the week, the team feels rather indifferent on safe havens.
In conclusion of this week's write-up, we would like to once again bring your focus back to the bigger picture as we close off with this question: "Can the U.S still hike Interest Rates this year?" If the answer is no, then we urge you to pick out on early trading signals to buy other currency majors pending their own Interest Rate hikes as it would be most certain for these currencies to strengthen against the USD.