WEEKLY REVIEW: 3rd September 2018
THE WEEK AHEAD
Market moving numbers: 3th September – 7th September 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) strengthened for the week to close at 95.05 as investors sought the safety of the U.S. currency after reports that the U.S. and Canada ended trade negotiations without any deal. The gain was also helped by the U.S Second Quarter Gross Domestic Product registering a seasonally-adjusted annual rate of 4.2% 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.
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, trade tensions between Europe and the U.S. rose again after Trump rejected on Thursday a European Union to eliminate tariffs on cars, resulting in European Commission President Jean-Claude Juncker replying that the European Union will respond in kind if Trump reneges on a pledge to refrain from imposing car tariffs. Also, markets remain worried about the heated dispute between the U.S. and China. In regards to China, the U.S.-China trade talks ended last Thursday with no major breakthrough, with Trump continuing his statement on Monday that it is not the right time for trade negotiations with China, hence denting expectations for a near-term deal after a breakthrough agreement between the U.S. and Mexico. This has set the stage for the U.S. to push ahead with the next round of tariffs on up to US$200 billion worth of Chinese goods, following the completion of the first round of US$50 billion tariff in products that Trump targeted in dispute over what U.S. officials say is the rampant theft of American technology. China has vowed reciprocal tariffs on the same amount of U.S. goods. The focus on the U.S.- China trade tensions is now shifted to 5th September, the deadline for Trump’s public comment on increased tariffs of US$200 billion on Chinese goods. 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 on July 1 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 and has proceeded to forged a bilateral trade deal with the U.S. to replace NAFTA. Nonetheless, the Peso still faces uncertainty until the North American Free Trade Agreement (NAFTA) is resolved as talks between Canada and the U.S. to renegotiate NAFTA ended on a sour note as the two sides failed to reach a deal on Friday. Nonetheless, the U.S. and Canada trade officials are planning to resume negotiations this Wednesday with the aim of getting a deal all three nations could sign though Trump has warned that he could proceed with a deal with Mexico alone and levy tariffs on Canada if it does not come on board with the revised trade term.
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, he publicly acknowledged last Friday that nuclear discussions between the U.S.and North Korea were not going according to plan and subsequently cancelled Secretary of State, Mike Pompeo’s planned trip to Pyongyang. It is becoming clear that both sides interpret the Singapore Declaration differently. Apparently, the U.S. wants to see a unilateral denuclearization on the part of North Korea, while North Korea sees the agreement in the broader context of the military balance of power on the Korean Peninsula. The rekindled tensions with North Korea could likely lead to a positive for gold in the weeks to come. Nonetheless, gold dropped slightly to the 1,2 01.9 level on Friday as expectation of higher interest rates in the U.S continue to stand as the main factor which drives the market.
The U.S. and the U.K. Purchasing Managers Index (PMI) releases this week will be closely watched for any change in both GDP and inflation guidance. The IHS Markit U.S. Manufacturing PMIs fell to 55.3 in July from 55.4 in June, well below market expectations of 55.5. The IHS Markit/CIPS U.K. Manufacturing PMI also fell to 54.0 in July 2018 from 54.4 in June, and lower than market expectations of 54.2. The outcome of these indicators sets the tone for the rest of the week, in which the stronger than forecast reading is generally bullish for the USD Great Britain Pound (GBP), while the lower than expected reading for the should be taken as bearish for both the USD and GBP.
On Friday, the U.S. Labour Department will release its non-farm payrolls for August and it will be watched more for the average hourly earnings figures, which are expected to rise 0.3%, given the tightness in the job market. However, a higher than expected should be taken as bullish for the USD; though if the release suggest otherwise, then the reading should be taken as bearish for the USD. Canada’s employment data is also published at the same time as the U.S. non-farm payrolls report. On Tuesday, the Reserve Bank of Australia (RBA) will publish its latest interest rate decision along with the policy statement, while the Bank of Canada (BoC) will publish its interest rate decision on Wednesday. The RBA is expected to keep rates unchanged at 1.50%, and should there be a neutral to dovish tone in the accompanying statement, then the AUD could weaken. Faced with a still-uncertain outlook for Canada’s future trade arrangements with the U.S., the BoC is also likely to leave interest rate unchanged at 1.50% at its Wednesday meeting.
While prices of cryptocurrency continue to spiral downwards, Bitcoin spiked in value this week to a two-week high as it traded above the $7,000 level for the first time since August 7, as investors shrugged off the U.S. Securities and Exchange Commission’s latest rejection of nine separate bitcoin-based exchange trade funds. 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. Nonetheless, Mexico and the U.S. announced a bilateral trade pact on Monday after more than a year of talks, thus setting the stage for Canada to sign on the trade pact that will revamp NAFTA. 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.