WEEKLY REVIEW: 20th August 2018
THE WEEK AHEAD
Market moving numbers: 20th August – 24th 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) dropped on a Friday-to-Friday basis to close at 96.13 on Friday, following news that China and the U.S. would resume trade negotiations again, which benefited risk sentiment on Thursday. Adding to the downward pressure of the greenback was the U.S Consumer Sentiment which dropped to 95.3 in August, according to the University of Michigan index on Friday.
On August 1, the FOMC voted unanimously to keep the target range for its benchmark interest rates at 1.75% to 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. 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. have been locked in a tit-for-tat trade spat for a few months after Donald Trump accused the Asian nation of intellectual property theft, gradually adding tariffs to each others' products in a dispute that threatens to curb economic activity in both countries. In the latest development, China has lodged a complain in the World Trade Organization over U.S.’s solar tariffs. Nonetheless, plans of a U.S.-China trade talks in Washington on August 21 and 22 have soothed nerves over the trade war. 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. The U.S. and Mexico, which have been in bilateral negotiations for about three weeks, are said to be working to reach a NAFTA cars deal by the end of August though Canada still remains on the outside of the current talks.
In regards to global politics, it has been two months since the meet up between Trump and North Korean President Kim Jung-un in Singapore in June 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 declared soon after the Singapore summit that North Korea no longer posed a nuclear threat, North Korea and the U.S. have been struggling to agree on how to bring about the North’s denuclearization. A bill signed by Trump on Monday has asked the Pentagon to pursue more options for stopping North Korean missiles by using radar and more missiles to spot and shoot down inbound threat. Also, despite having open talks with North Korea, the U.S. continues to enforce embargo on trade with North Korea in order to put pressure on the country to end its nuclear weapons and ballistic missile program. The rekindled tensions with North Korea could likely lead to a positive for gold in the weeks to come. Nonetheless, gold fell further to the 1,184.79 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 FOMC meeting minutes which is scheduled for release on Monday, August 20 stands to be the main volatility highlight for the week as hawkish comments from Chairman Powell may contribute to the likeliness of four rate-hikes in 2018, the outcome of the next European Central Bank (ECB) Governing Council’s monetary policy meeting which is scheduled for Thursday, August 23 may highlight a dovish forward-guidance for monetary policy as President of the ECB, Mario Draghi, stick to the easing-cycle, and the zero-interest rate policy (ZIRP) in Europe. 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.
On Monday, the Reserve Bank of Australia (RBA) will publish its Monetary Policy Meeting Minutes. If the central bank present the market with dovish statements or indicate that it is extending its outlook for an eventual interest rate rise, hence implying that the slowing economy will continue to need low interest rates to stimulate growth, a further fall in both the AUD/USD can almost be certain.
The overhang of Brexit continues to provide an uncertain outlook for the Great Britain Pound (GBP). The initial response to Prime Minister (PM) Theresa May’s soft Brexit proposal had seemingly placed GBP on a firm footing. However, there was a quick reversal seen after the proposal led to the resignation of key MPs in PM May’s cabinet, most notably, Foreign Secretary Boris Johnson and Brexit Minister David Davis, consequently weighing on the GBP as the risk of a 'no Brexit deal' scenario had increased. The GBP/USD exchange rate rally could also be affected by any further remarks about Brexit.
Another closely-monitored direct currency pair would be the USD/CAD pair as investors look at the Canadian Core Retail Sales figure on Friday for further clues on when and how fast the Bank of Canada will raise interest rates as a pick-up in inflation should boost expectations over further interest rate hikes.
Prices of cryptocurrency continue to spiral downwards. Bitcoin failed to extend its rebound in July and fell below $6,000.00 on Tuesday. Dozens of smaller digital tokens also tumbled as this month’s sell off in cryptocurrencies showed few signs of letting up. While cryptocurrencies rallied in July on hopes that a Bitcoin-backed exchange-traded fund would attract new investors, the U.S. Securities and Exchange Commission has yet to sign off on multiple proposals for such a product. 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 since June when the U.S. slapped tariffs on Mexican and Canadian steel and aluminum and both countries responded with retaliatory measures on products like U.S. pork, ketchup and Kentucky bourbon. 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. Mexico and the U.S. has since then been in bilateral negotiations and appears to be getting close to striking a deal in their talks to revise NAFTA, but Canada has been sitting on the sidelines during these discussions. Should there be more headlines about the future of NAFTA, 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.