WEEKLY REVIEW: 14th May 2018
THE WEEK AHEAD
Market moving numbers: 14th May – 18th May 2018:
New Federal Reserve Chairman, Jerome Powell's statement which indicated that there might be a possibility of as many as four Interest Rate hikes out of the Federal Open Market Committee (FOMC) to take place this 2018 has most certainly rattled markets, especially with the growing anti-trade sentiments which shrouds over the United States (U.S) economy. While the U.S Federal Open Market Committee (FOMC) raised rates for the first time this year as expected, markets showed a strong 'buy on rumour, sell on fact' move as traders are seen to unwind their long U.S Dollar (USD) positions as soon as the FOMC decision took place. This behaviour has been validated several times for example during a better U.S Gross Domestic Product (GDP) release this March 2018 at 2.9% (Forecast: 2.7%) and during the March 2018 U.S Nonfarm Payrolls (NFP) release which fell below forecast at 103k (Forecast: 193k).
Over the course of these past two weeks however, the May 2018 U.S NFP & April 2018 Consumer Price Index (CPI) release did not follow a similar pattern despite weaker numbers (Actual: 164K; Expected: 192k; Actual: 2.1%; Expected: 2.2%). The U.S Dollar continued to rise as indicated by the U.S Dollar Index (DX) from the 92 level in the previous week up to the 93 level this week. Forecasters attribute this towards the more bullish FOMC statement made which indicated that levels of inflation as indicated by the Consumer Price Index (CPI) can potentially rise ahead of the targeted 2% mark this year.
This week, the largest volatility driver as opined by the team here at EssenceFX would be the U.S April 2018 Retail Sales data. Nonetheless, the team views the growing anti-trade sentiments to also weigh on the USD. The team will continue to track the implications and effects it brings specially given U.S President Trump's recently signed memorandum imposing wide-ranging tariffs of up to U.S$60 billion on China. The team here notes that in retaliation, China's President Xi Jinping has announced tariffs to be imposed on 128 U.S goods. This led to Trump's announcement on a potential U.S$100 billion worth of additional tariffs on China last week. The team here at EssenceFX will continue to track these developments and the implications it brings on currencies. Recently, President Trump has once again made it into the headlines on news that he might want to bring in the Trans-Pacific Partnership Agreement into play once again to further pressure China.
In regards to global politics, following the harsh exchange of words which has formerly taken place between United States (U.S) and North Korea as reflected by the leaders of the two countries, there is now talks of a three-way summit which is scheduled to take place between South & North Korea and The U.S. The South Korean President, Moon Jae-in noted that nuclear disarmament is not something that can be realised through an agreement merely between South and North Korea alone. President Moon views it to be an agreement which requires a U.S guarantee that normalisation of some economic rationalization between the U.S and North Korea will take place following any disarmament. This summit will first kick-off following the meeting between North Korea & South Korea which took place during the end of April 2018. Following this, U.S President Trump is scheduled to meet North Korean President Kim Jung-un in Singapore this 12th of June. This has translated into a positive for gold, on top of the various other anti-trade sentiments implemented by the U.S, causing the commodity to sustain around the 1,315 level.
Over the past few months, prices of cryptocurrencies have dwindled since the crackdowns made in Korean Cypto Exchanges. In addition to this, there seems to be a growing negative tone by global regulators. In a related perspective, several recent developments have also caused us to reassess our longer term take on gold for one; the 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 strong view the team has 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 to cash out their holdings in crypto and switch 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. In regards to recent 2018 Italian Elections, we witnessed more unexpected scenario's just as formerly opined by the team here at EssenceFX with the anti-EU Five-Star Movement which shocked markets by taking more than 30% of the tally. The more 'populist' or 'Eurosceptic' parties in our opinion has potential to place renewed and substantial pressure on the Euro (EUR) as they move to table their respective policies. The team here at EssenceFX will track this potential pressures in the EUR in the weeks to come.
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 'more certain' (post Powell), we urge you to pick out on early trading signals to "buy on rumour sell on fact" as currency majors have been following this trend so far, moving along this 2018.