WEEKLY REVIEW: 12th November 2017
THE WEEK AHEAD
Market moving numbers: 13th November – 17th November 2017:
This week's fundamental focus hinges mostly on the various currency major country Consumer Price Index (CPI) report releases which will be due throughout the week. In regards to the United States (U.S), the market seems to have already priced in a strong probability of occurrence for a third U.S Federal Open Market Committee (FOMC) Interest Rate hike to take place by December 2017 which would bring up the FOMC Interest Rate UP to 1.50%. This year, the FOMC has already hiked Interest Rates twice; by one notch on March 2017 and by another notch on June 2017. The main two drivers which contributed towards an FOMC decision to hike Interest Rates in our opinion would be the:
i) Steady growth in overall income as indicated by the U.S Nonfarm Payrolls (NFP)
ii) Stable price growth as indicated by the U.S Consumer Price Index (CPI)
In regards to the American Nonfarm Payrolls, the average 2017 NFP stands somewhere around 160k. The team here at EssenceFX foresees the average NFP to range somewhere between 180-200k by the end of 2017 which gives some footing for the FOMC to undertake more Interest Rate hikes moving forward. In addition, the team here at EssenceFX views that the increasing price inflation is indicative of better purchasing power. This should be validated by the October 2017 Core Retail Sales data due sometime midweek. In regards to the American CPI, what's interesting to note is that price inflation has started to pick up again post the implementation of the two U.S Interest Rate hikes (refer to chart below):
In our view, this marks as a rather strong indication that the FOMC will be able to hike their Interest Rate for a third time by December this year. Therefore for the week, the team here at EssenceFX views the American CPI and Retail Sales related data to spur about the most volatility for the week.
Notwithstanding that, the team here at EssenceFX also encourages our readers to take into account the other CPI related data due for the week. Prior to that, the team notes on the three upcoming Gross Domestic Product (GDP) releases namely the German, the Eurozone, and the Japanese GDP release. In our opinion, since both the European Central Bank (ECB) and Bank of Japan (BoJ) has remained firm on not wanting to increase interest rates this year despite widely expected better economic growth numbers; the team of us think that only high inflation (i.e a higher than expected CPI) can force for a rates increase sooner. Hence, the team of us view CPI related data to be the more defining release which would influence over currency values for the week.
The first CPI release to take place for the week would be from the United Kingdom (U.K). In addition to this, the U.K has arguably the most significant economic releases amongst all currency majors for the week which would definitely cause some major swings in their currency. In addition to the CPI, the U.K will also be releasing their September 2017 Average Earnings Index + Bonus, their October 2017 Claimant Count Change, and their October 2017 Retail Sales data. These releases should indicate better on whether a rate increase can take place as forecasted by March 2018 next year, or earlier.
The next CPI release to highlight, which takes place after the midweek U.S CPI release would be in regards to the Eurozone. Reiterating a little on the European Central Bank (ECB's) decision, the committee agreed on slower bond buying plans with a pledge to cut the amount of monthly bonds it purchases in half, - from 60 billion to 30 billion euros. Ideally, the team of us opine that this should drive the Euro lower at least until the December 2017 FOMC is over. Nonetheless, a strong GDP and a high CPI report could likely encourage the ECB to speed up the process.
Finally, the end of the week's October 2017 Canadian Core CPI release should stand as a testament on whether the Bank of Canada can continue raising Interest Rates this year. Canada continues to rank as one of the best economic performers this year; The Organization for Economic Co-operation and Development (OECD) raised their expectations for economic growth in Canada this year compared with an earlier June 2017 forecast, ranking them as the best performer in a group of currency major economies.
Covering a little on potential regulatory risk, it was formerly mentioned that U.S Federal Reserve Chair Janet Yellen will be given another term in her position when it comes to an end on February 2018. However, recent developments point that current Federal Reserve governor Jerome Powell is now the top candidate named by President Trump for potential consideration. A change of leadership usually translates into some policy related uncertainty and hence, could trigger some USD weakness. The team here at EssenceFX encourages our readers to keep up to date with this development.
In regards to global politics, there now seems to be what we'd call a more quiet secondary exchange between The United States and North Korea. Formerly, U.S President Trump quoted that: "The United States has great strength and patience, but if it is forced to defend itself or its allies, we will have no choice but to totally destroy North Korea. Rocket Man is on a suicide mission for himself and for his regime,” Trump said. “The United States is ready, willing and able. But hopefully, this will not be necessary. That’s what the United Nations is all about. That’s what the United Nations is for. Let’s see how they do. In response, North Korea mentioned that "targeting the U.S. mainland with its rockets was inevitable after 'Mr. Evil President' Donald Trump called Pyongyang’s leader 'rocket man', further escalating rhetoric over the North’s nuclear weapons and missile programs". At present, with the exception of this twitter post recently made by U.S President Trump, both countries have seemed to form somewhat a silent truce without any direct confrontations taking place. This has led to a fall in the demand for safe havens assets.
Gold still prices at the high 1,200 zone despite dropping from the 1,300 level. The team notes that Gold is now starting to trend lower on FOMC Interest Rate optimism as well as a lack of fresh verbal exchange between the U.S and North Korea. In an alternate perspective, several recent developments have also caused us to reassess our longer term take on gold 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 haven to provide you with a better overview.
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 to also reflect on the surprises the recently announced German Elections has brought about, with the far right Alternative for Deutschland (AfD) party gaining strong momentum; resulting to their entry into parliament. The the team here at EssenceFX opines the Italian Elections which is set to take place sometime during 2018 to bring about more unexpected scenarios.
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.
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?" Since the answer is now looking like a strong 'yes', we urge you to pick out on early trading signals to sell other currency majors in absence of any further Interest Rate hikes (with the exception of the Canadian Dollar) for the year as it would be most certain for these currencies to weaken against the USD moving towards December 2017.