WEEKLY REVIEW: 23rd July 2018
THE WEEK AHEAD
Market moving numbers: 23rd July – 28th July 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) this 2018 has most certainly rattled markets, especially with the growing anti-trade sentiments which continues to shroud over the United States (U.S) economy. Nonetheless, over the course of these past four months, even negative U.S related economic data did not deter the U.S Dollar (USD) from sustaining a steady uptrend. Forecasters have been attributing this occurrence towards the more bullish FOMC statements made which indicate that levels of inflation as shown by the Consumer Price Index (CPI) can potentially keep hovering ahead of the targeted 2% mark this year. The U.S Dollar Index (DX) steadied for the week to close at 94.78 in the wake of the bullish comments from Powell about the strength of the U.S. economy. The gain was also helped by U.S Retail Sales coming out as expected at 0.5% for June.
Last month, the FOMC raised the benchmark interest rates to 1.75% from 2.0%. While this move was largely anticipated, the team here at EssenceFX notes on the sustenance in the USD's strength as reflected by the DX which goes against the typical 'sell on fact' move usually seen. This strongly indicates that markets maintain a generally hawkish sentiment in regards to the USD and are pricing in for one more rate hike in September 2018 and a likelihood of another rate hike in December, which would then bring the total number of rate hikes to 4 in 2018 though this move was criticized by Trump on Thursday. Whilst, the outlook is less uncertain for now with trade tensions escalating, the USD is expected to rise further on the view that U.S. inflation pressures will pick up as the conventional wisdom is that, any escalation in trade conflict between the U.S. and its trading partners will feed through to inflation.
Politically, while the Trump and Kim meeting which took place in Singapore in mid-June 2018 seemed to have fared well, the U.S are still in a pretty rattled relationship with China and Canada. In regards to China, China and the U.S. are currently engaged in a battle of import tariffs after Donald Trump accused the Asian nation of intellectual property theft. The U.S. administration’s proposed tariffs on USD$200 billion in Chinese exports have taken the U.S.-China trade tensions to a new high. While the announced duties will only take effect following a review process that is likely to take place between October and November, the latest tariff announcement come on the heels of the USD$34 billion tariff in Chinese products that took effect earlier in the month. Trump has also made good on several months of threats and imposed tariffs of 25% on steel and 10% of aluminum from the EU, Canada and Mexico, resulting in Canada imposing tariffs against U.S. exports in retaliation for US tariffs on steel and aluminium. The European Commission has told the US Commerce Department that if the U.S. persists with planned tariffs on European Union cars and auto parts, the EU would enact counter-measures that would hit a wide range of U.S. exports to the EU. The U.S. on Monday brought cases against China, the European Union, Canada, Mexico and Turkey to the World Trade Organization, in a bid to challenge retaliatory tariffs imposed by the five nations following U.S. duties on steel and aluminium. A decline in U.S. financial markets could be an impact that could occur as the trade wars escalates. The Mexico presidential elections last month also marks a new stage for the country's relations with the U.S. Lopez who has been highly critical of Trump in a time where relations between the two neighbors were increasingly strained, struck a more conciliatory tone regarding Trump in his post-election speech. Despite his affable approach towards U.S., Lopez’s victory did little for the Mexican Peso which fell against the USD. The Peso still faces uncertainty until the North American Free Trade Agreement (NAFTA) is resolved.
Trump will meet European Commission chief Jean-Claude Juncker in Washington this week to discuss the trade conflict, when the two parties will look into whether the EU will be able to avoid a further escalation in the tariffs conflict between the EU and the U.S. by reducing tariffs on cars. Markets will listen closely for clues as to whether the meeting resolves differences over tariffs and policy, or if it points to a further escalation in the trade conflict.
In regards to global politics, It has been almost six weeks since the meet up between Trump and North Korean President Kim Jung-un in Singapore which resulted in a signed joint statement that committed both sides to establishing new relations and a path to peace on the Korean Peninsula.While Trump asserted that North Korea was "no longer a nuclear threat" upon his return from Singapore, North Korea has not publicly confirmed that it has dismantled any of its nuclear weapons or ballistic missile infrastructure since the June 12 meeting. Trump has responded on Wednesday that.there is "no rush" in its negotiations with North Korea over Pyongyang's nuclear weapons program. The two sides could meet again July 27, when the US is expecting North Korea to return possible remains of US service members who died in the Korean War. However, there is also likely to be a degree of disappointment in Washington after North Korea agreed to return the remains of only 55 American servicemen killed in the Korean War. Earlier reports had suggested that Pyongyang was willing and ready to return more than 200 sets of human remains and the US handed over more than 200 coffins at the Panmunjom Joint Security Area. The rekindled tensions with North Korea and coupled with the escalating trade war between U.S. and China, could likely lead to a positive for Gold in the weeks to come. Nonetheless, gold fell further to the 1,231.78 level on Friday as expectation of higher interest rates in the U.S continue to stand as the main factor which drives the market.
While the U.S Second Quarter Gross Domestic Product (GDP) which is scheduled for release by the end of the week stands to be the main volatility highlight for the week, the outcome of the next European Central Bank (ECB) Governing Council’s monetary policy meeting which is scheduled for Thursday 26th July could also bring about some surprises for foreign exchange traders as they set the official interest rates for the eurozone. Traders expect interest rate hikes to increase the value of the Euro relative to other currencies. Conversely, lower interest rates or the implementation of quantitative easing is likely to have the opposite effect.
The main release for the Australian Dollar (AUD) in the week ahead is Australia’s Q2 CPI reading in Wednesday’s Asian session. While economists expect Q2 inflation data to show that any acceleration in inflationary pressures remains very gradual, a higher than expected reading is generally bullish for the AUD, while a lower than expected reading should be taken as bearish for the AUD.
While prices of cryptocurrency continue to spiral downwards, cryptocurrencies extended their rebound on Tuesday as Bitcoin traded above $7,500 for the first time in a month, shrugging off security and regulatory concerns that have plagued the digital currency for much of this year. So while the positive price action infuses some optimism into the market, volatility is expected to remain elevated. 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 favored 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) general elections (GE); 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 General 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. Mexico saw Andres Manuel Lopez Obrador winning its presidential election, hence setting the stage for a government that will inherit the North American Free Trade Agreement negotiations with Canada and the U.S., which has snagged notably owing to U.S. demands to increase American content installed in duty-free autos. However, Manuel Lopez, who once referred to President Trump as “erratic and arrogant”, has struck a conciliatory tone toward after his victory by thanking Trump for his congratulatory message and declaring his desire for friendship and mutual respect. Lopez has vowed to work with the U.S. to revise the trade pact. Should there be more headlines about the intentions of the new president, volatility might arise on MXN. Following the Mexican GE, for this 2018 we will see Columbia's GE on June 17th, Turkey's GE on June 24th, Brazil's GE on October 7th, and U.S GE on November 6th.
Nonetheless for the case of the Europeans, a recent update the team of us view which adds pertinent to the strength to 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: "Will the U.S still hike Interest Rates this year?" Since the answer currently remains as somewhat 'more certain' (post Fed Powell's statement), we urge you to pick out on early trading signals to "buy on rumor and sell on fact" as currency majors have been following this trend so far, moving along 2018.