WEEKLY REVIEW: 20th November 2017
THE WEEK AHEAD
Market moving numbers: 20th November – 25th November 2017:
This week stands out quite a bit compared to the previous ones as there is very little or almost no market moving data. Amidst this absence, the team here at EssenceFX have identified the perhaps already much priced in Federal Open Market Committee (FOMC) Meeting Minutes to trigger the most volatility; falling in second place would be a tie for both the German and English Third Quarter (Q3) Gross Domestic Product (GDP). These two releases are scheduled for release towards the later part of the week, and is expected to bring about some volatility in favour of the Euro (EUR) and the Great Britain Pound (GBP).
In regards to this weeks slightly later release, the team has decided to record our findings in regards to the FOMC Meeting Minutes release before we reach the much anticipated United States (U.S) GDP scheduled for release next week. Minutes from the FOMC indicated that members almost universally shared positive views on consumer spending, labour market, and manufacturing growth which recorded gains warranting a third FOMC Interest Rate hike. However, some disagreement was seen in regards to the pace of inflation in the U.S economy, indicating some possibility for the FOMC to change their approach towards addressing inflation.
Reitrating a little on inflation, EssenceFX views that the increasing price inflation has been well sustained; 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 for the FOMC to continue hiking the Interest Rate for a third time by December this year despite concerns raised in the recent FOMC Meeting Minutes.
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.
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, Federal Reserve governor Jerome Powell has been named and confirmed by President Trump to take over Janet Yellen effective next February 2018. 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 exchanges 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.