WEEKLY REVIEW: 30th July 2018
THE WEEK AHEAD
Market moving numbers: 30th July – 3rd August 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 94.67 on news that U.S. President Donald Trump obtained concessions from the European Union (EU) to avoid a trade war. The gain was also helped by the U.S Second Quarter Gross Domestic Product registering a seasonally-adjusted annual rate of 4.1% growth in the three month period from April to June, hence matching forecasts and underlining the case for the Federal Reserve to proceed with plans to gradually increase interest rates.
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 via his Twitter feed on Friday – stating that the “tightening now hurts all that we have done”. 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 meeting between Trump and European Commission chief Jean-Claude Juncker which took place in Washington on July 25 to discuss the trade conflict seemed to have fared well with Trump reporting that he and Juncker had agreed to work to lower the industrial tariffs on both sides and to increase European imports of liquified natural gas and soybeans from the U.S., among other measures, markets remain worried about the heated dispute between the U.S. and China. 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. A decline in U.S. financial markets could be an impact that could occur as the trade wars escalates. The Mexico presidential election last month also marks a new stage for the country's relations with the U.S. President-elect Andrés Manuel López Obrado has since struck a more conciliatory tone regarding Trump. While the Peso still faces uncertainty until the North American Free Trade Agreement (NAFTA) is resolved, Lopez has vowed to work with the U.S. to revise the trade pact and has called for a swift conclusion to the negotiations to reach an updated NAFTA deal in a letter to Trump earlier this month.
In regards to global politics, it has been 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 the Singapore summit, where Trump and Kim agreed to work towards the complete denuclearization of the Korean Peninsula, has been criticised for a lack of detail on when or how Pyongyang would renounce nuclear weapon, a U.S.-based website, 38 North, had reported on Monday that based on its analysis of satellite images, North Korea has begun dismantling key facilities at the Sohae Satellite Launching Station, a rocket launching site on the northwest coast of the country. If confirmed, this analysis could signal a step forward after the Summit and could be an important move to keep negotiations for the complete denuclearization of the Korean Peninsula going. The return of the remains of the 55 U.S. troops killed during the 1950-1953 Korean War on Friday morning is the latest move in the cautious diplomacy between Washington and Pyongyang. This has translated into a negative for gold, causing the commodity to fall even further this week to the 1223 level.
On Friday, the U.S. Labour Department will release its non-farm payrolls for July and it will be watched more for what it says about average hourly earnings figures than hiring, which are expected to rise 0.3%. This week's economic calendar also features reports on personal income and spending, which includes the personal consumption expenditures inflation data. A higher than expected reading should be taken as positive/bullish for the USD, while a lower than expected reading should be taken as negative/bearish for the USD. There will also be the release of the post-meeting statement from the Federal Reserve’s two-day policy meeting on Thursday where investors will be looking for any clues on whether it will follow through with rate hikes in September and again in December. However, if the statement suggest otherwise, then there is a risk for some dollar profit-taking ahead of Friday’s jobs report. New Zealand employment figures is also published on Wednesday. On Tuesday, the Bank of Japan (BoJ) will meet to discuss and decide its monetary policy and is expected to change its loose monetary policy . The BoJ is expected to adjust its stimulus program to make it more sustainable, such as allowing greater swings in interest rates, which is set to remind us that its monetary policy is extremely dovish while the Fed is hawkish. This could lead to gains for the USD/JPY pair.
The main release for the GBP in the week ahead is Bank of England’s rate decision on Thursday as it releases its latest monetary policy announcement with growing expectations of a 0.25% rate hike. A rate hike should leave room for a move higher for the GBP after it has had a poor week last week, especially against a strong US dollar. The U.K. Services Purchasing Managers Index release on Friday will also be closely watched for any change in both GDP and inflation guidance as a higher than expected reading should be taken as positive/bullish for the GBP, while a lower than expected reading should be taken as negative/bearish for the GBP.
While prices of cryptocurrency continue to spiral downwards, cryptocurrencies continue to extend their rebound as Bitcoin hit a two-month high on Tuesday and surpassed the $8,000 level for the first time since May 23, 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 NAFTA negotiations with Canada and the U.S., which have been stalled for several months after Canada and Mexico could not keep up with the U.S. administration’s demands, particularly that 75 percent of all car parts be sourced from the three countries in order to qualify for tariff exemptions. However, in a letter to Trump delivered on July 13, Manuel Lopez has called on Trump to pursue renewed NAFTA negotiations aimed at a final agreement including all three countries in the pact; while on July 18, Trump had said that he may prioritize a separate trade deal with Mexico. 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.