WEEKLY REVIEW: 1st January 2018
THE WEEK AHEAD
Market moving numbers: 1st January – 5th January 2018:
The team here at EssenceFX would like to welcome all of our readers back to our reviews and would like to wish everyone a very Happy New Year! The team of us took a break from our routine weekly write-ups for the month of December 2017 and focused on updating our Annual 2018 Market Forecast which is now available to all our readers on our research landing page here.
Prior to kick-starting our weekly reviews once again for this brand new 2018, the team here at EssenceFX think it would be important to first analyze how certain currencies (and selected asset classes) have performed post the United States (U.S) Federal Open Market Committee (FOMC) Interest Rate Hike decision. The FOMC meeting that was held on the 12th and 13th of December 2017 decided for the Fed Funds rate to range between 1.25 - 1.50%. Despite continued optimism out of the FOMC to support as much as three interest rate hikes this 2018, the overall U.S Dollar (USD) started the year on a softer note as further indicated in the table below.
In regards to this week, the U.S December 2017 Nonfarm Payroll (NFP) will likely be the key currency pair volatility driver. The team here at EssenceFX opine that a weaker than expected U.S NFP could trigger further lows for the U.S Dollar. The team also opines that even if the NFP meets forecast; such an aggressive sell which is currently taking place testing key support levels will take awhile to subside, even if backed by a positive NFP. Since the release of the previous FOMC Meeting 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) weakened rather noticeably. This week, we are set to see another similar FOMC Meeting Minutes release take place sometime during midweek. The team here at EssenceFX views stronger probability for a continuation of a downtrend as indicated in the chart below:
Delving deeper on what was noted down in the previous 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 at EssenceFX will continue to promptly track the inflation data out of the U.S and update our readers accordingly moving along this 2018.
In our view, given that this week marks the start of a fresh year, the team here at EssenceFX prefer for the markets (specially the colossals) to indicate some better stance first prior to analyzing deeper into individual currency cross correlations against the USD.
Covering a little on potential regulatory risk, Federal Reserve governor Jerome Powell has been named and confirmed by President Trump to take over Janet Yellen effective next February 2018. A recent update which took place on early 2018 indicates that The Senate Banking Committee has approved Fed Governor Jerome Powell to take over as chair of the central bank. 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. Meanwhile just to point out, this could be the reason the USD has starting to aggresively weaken recently.
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, 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 due to political risk reasons.
Nonetheless gold has surged to the high 1,300 zone on the back of what we'd like to term as 'cryptocurrency bubble risk'. Over the past few weeks, prices of cryptocurrencies have dwindled after news of reported hacks on cryptocurrency exchanges taking place. In a related 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. One the the team opines moving along this 2018 is that falls in cryptocurrencies has somewhat led to the increase in gold prices, indicating to us a growing tendency of crypto holders cashing out their holdings in crypto and switching in to the age old safe haven (gold) for protection of value.
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 this 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 currently remains as somewhat 'ambiguous', we urge you to pick out on early trading signals to buy 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 strengthen against the USD moving until further optimism of more interest rate hikes are gathered moving along this 2018.