WEEKLY REVIEW: 27th November 2017
THE WEEK AHEAD
Market moving numbers: 27th November – 1st December 2017:
*This week's Economic Calendar excludes the United Kingdom Bank Stress Test Results and the Organization of the Petroleum Exporting Countries (OPEC) which is set to take place sometime during the earlier half of the week. The team expects these economic releases to bring about some added trading volatility and encourages our readers to keep track of their exact release times*
The United States (U.S) Third Quarter (Q3) Gross Domestic Product (GDP) will likely be this weeks key currency pair volatility driver. The team here at EssenceFX thinks that the U.S Q3 GDP release will be crucial in determining this week's dominant trend for currency pairs against the U.S Dollar (USD) post it's midweek release. Since the release of the recent Federal Open Market Committee (FOMC) Meeeting Minutes which showed some disagreement between committee members in regards to the pace of inflation in the U.S economy; it can be seen that the U.S Dollar Index (DX) has weakened rather noticeably:
However, the DX is seen to regain some of it's lost strength this week (as indicated in the upward arrow in the chart above). Delving deeper on what was noted down in the FOMC's Meeting Minutes, FOMC 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.
The team here at EssenceFX opines that a U.S Q3 GDP results which meets expectations is good enough to warrant continuity in U.S Dollar strength again. The team's belief falls in line with the increasing price inflation which has well sustained over the past few months (despite being weaker than expected by some FOMC members); 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. Nonetheless for the week, the EssenceFX team also notes on several other currency major pair related GDP releases as well as a chance for a softer U.S Q3 GDP which could stand to erode on the gains made by the DX once again. There are a total of two other GDP releases which is due this week namely; the British and Canadian GDP. In the case of the United Kindom (U.K), the Great Britain Pound (GBP) has moved up as high as 1.3380 level before tracking lower. The end of the week's U.K Manufacturing Purchasing Managers Index (PMI) if largely positive, could reignite some strength the the GBP again. A recent news for the week which dampens U.K's longer term outlook would be U.K having officially lost its spot on the list of the world’s five largest economies.
In regards to Canada, it is market known that 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. Currently, the USD/CAD continues to hover around the 1.28 figure level. On a lesser note, the European Central Bank (ECB) is set to release their November 2017 Consumer Price Index this week. Reiterating a little on the European Central Bank (ECB's) take on Interest Rates, 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 since no indication sof upcomming Interest Rate hikes seem to be on the table. Nonetheless, solid German data coupled with a sharply increasing CPI could likely encourage the ECB to speed up the process.
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.