WEEKLY REVIEW: 10th September 2018
THE WEEK AHEAD
Market moving numbers: 10th September – 14th 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 95.34. The U.S. dollar was boosted by the U.S. non-farm payrolls data for August that saw U.S. job growth accelerating in August and wages recording their largest annual increase in nine years, hence strengthening views that the U.S. economy was so far weathering an escalating trade war with China and underlining the case for the Federal Reserve to proceed with plans to gradually increase interest rates. However, investors remain jittery about U.S. trade relations after U.S. President Donald Trump said he could hit China with more tariffs and alluded to trade talks with Japan while negotiations with Canada to revamp the North American Free Trade Agreement (NAFTA) continue.
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, 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. The U.S. and European Union (EU) trade chiefs will hold a first meeting in Brussels on Monday to pursue closer transatlantic ties after Trump agreed to drop his threat on tariffs on EU cars. Nonetheless, markets remain worried about the heated dispute between the U.S. and China. In regards to China, the public comment period for proposed U.S. tariffs on an additional US$200 billion worth of Chinese imports has passed and the tariffs could now go into effect at any moment, although there was no clear timetable. Although China has warned of retaliation if Washington implements any new tariff measures, Trump warned on Friday that he was ready to slap tariffs in virtually all Chinese imports into the U.S., threatening duties on another US$267 billion of goods on top of the US$200 billion in imports. Nonetheless, White House economic advisor, Larry Kudlow, has said that Washington and Beijing continue to hold discussions to try to resolve the ongoing dispute over China’s trade policies. 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 Canada and the U.S. have yet to reach a deal on NAFTA. While the U.S. and Canada trade officials have avoided speaking publicly about the details of the negotiations, or speculate about how long it will be until it is over, there is a mounting pressure for Canada and the U.S. to make a deal happen by the end of September 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 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 criticized for a lack of detail on when or how Pyongyang would renounce nuclear weapon, South Korean officials said on Thursday, ahead of a meeting between Kim Jong-Un and South Korean president Moon Jae-in on Sept 18th to 20th to discuss denuclearization, that Kim has expressed his intentions to denuclearize and end long-standing hostile relations between NorthKorea and the U.S. during Trump’s first term ending early 2021. If confirmed, this statement 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 as this is the first time that Kim has offered a potential timeline for dismantling his country’s nuclear weapons program. This latest move in the cautious diplomacy with Pyongyang has translated into a negative for gold, causing the commodity to fall even further this week to the 1,195.64 level.
This week, the monthly Consumer Price Index (CPI) will be one if the most important indicators monitored by foreign exchange traders. The release and revisions of the CPI figure by the Bureau of Labor Statistics can produce swings in the U.S. dollar’s value to other foreign currencies. While a low inflation does not guarantee a favorable exchange rate for a country, but an extremely high inflation rate is likely to impact a country’s exchange rates with other nations negatively.
Another closely-monitored US dollar currency pair would be the USD/GBP pair, seeing that monthly output figures on industry, manufacturing and services will be released together with the latest GDP estimates and trade figures on Monday. Investors will also be looking at the monthly GDP estimates for July for a wider gauge of the economy. The U.K. economy is forecast to have grown by 0.2% month on month in July, which would produce an annual figure of 1.4%. If confirmed, it would indicate a sound start to the third quarter. 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.
The European Central Bank (ECB) will be publishing its last meeting minutes this Thursday. While the ECB has outlined its intention to end its quantitative easing stimulus program by the end of 2018 and hold interest rates until the second half of 2019, however, the meeting will still be watched closely as new quarterly staff projections will be published that could reveal some changes to the ECB’s growth and inflation forecasts for the Eurozone for the next two to three years. If the ECB decides to raise interest rates earlier, this should boost the Euro.
Prices of cryptocurrency continue to spiral downwards. Bitcoin failed to extend its rebound last week after dropping below $7,000 level this week with other cryptocurrency prices plunging across the board following reports that Goldman Sachs is dropping its plan to open a trading desk for cryptocurrencies. 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 last 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.