WEEKLY REVIEW: 1st October 2018
THE WEEK AHEAD
Market moving numbers: 1st October – 5th October 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) to take place this 2018 has most certainly rattled markets, specially with the growing anti-trade sentiments which shrouds over the United States (U.S) economy. While the U.S Federal Open Market Committee (FOMC) raised rates for the third time this year as expected, markets showed a strong 'buy on rumour, sell on fact' move as traders are seen to unwind their long U.S Dollar (USD) positions as soon as the FOMC decision took place. This behaviour has been further validated following a better second estimate of U.S Gross Domestic Product (GDP) growth of 4.2% for the April to June 2018 quarter, the fastest in nearly four years. Following the hike in interest rates by the Federal Reserve last Wednesday and the upbeat U.S. macroeconomic data releases, the U.S Dollar Index (DXY) climbed to a two week peak to close at 95.13 last Friday. Nonetheless, the team here at EssenceFX will continue to track the implications of growing anti-trade sentiments and the effects it brings on the overall U.S Dollar given that the U.S. and China are now fully engaged in a $360 billion trade war with threats to expand further.
On September 24, the FOMC voted to increase its benchmark interest rates by a quarter of a percentage point to a range of 2.00% to 2.25%. 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 December, which would then bring the total number of rate hikes to 4 in 2018 though this move was previously 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, U.S. trade representatives and Japan’s economy minister has begun second round of trade talks in which Japan wants to stop import tariffs on its cars and fend off U.S. demands for a free-trade agreement, while considering lowering tariffs on U.S. agriculture in exchange for avoiding higher auto tariffs. Also, 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, both sides are still in exploratory talks on how they can pursue a limited trade agreement, with no real negotiations yet started. The markets remain worried about the heated dispute between the U.S. and China. While both sides had already levied 25% duties on $50 billion worth of each other’s goods in an intensifying trade row, U.S. tariffs on US$200 billion of Chinese goods and retaliatory tariffs by Beijing on US$60 billion worth of U.S. goods took effect last Monday, September 24. Soon after new duties went into effect, China accused the U.S. of engaging in trade bullyism and warned that it would respond to any rise in U.S. tariffs on Chinese products accordingly though Trump reiterated a threat to impose further tariffs 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 the North American Free Trade Agreement (NAFTA). Nonetheless, the Peso still faces uncertainty until the NAFTA is resolved as Canada and the U.S. have yet to reach a deal on NAFTA. In the latest development of the U.S. and Canada NAFTA negotiation, Canadian Prime Minister Justin Trudeau has vowed to defend the dairy protections while President Trump has called Canada’s dairy protections a disgrace, thus causing his top aides to warn that they are an obstacle in reaching a deal on a revised NAFTA agreement before a late September deadline. Trump had earlier 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. Canada’s protected dairy industry is one of the three sticky points in NAFTA talks between the two countries, along with a system for settling trade disputes and cultural protections for Canadian media firms.
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. 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. In his speech to the annual United Nations General Assembly last Tuesday, Trump praised Kim for his courage and for taking steps to disarm, but added that sanctions must remain in place on North Korea until it denuclearizes. Trump also expressed enthusiasm for the second summit between Trump and Kim that Kim had earlier proposed. This latest move in the cautious diplomacy with Pyongyang has translated into a negative for gold, causing the commodity to fall below the key $1,200 psychological mark to the 1,192.16 mark last Friday.
This week, the prime volatility trigger is viewed to be the U.S Nonfarm Payrolls (NFP) release which is scheduled to be announced at the end of the week. The growing anti-trade sentiments in the U.S would require at least a sustained NFP figure to preserve market optimism for further interest rate increases out of the U.S.
In addition to the U.S NFP release, the Reserve Bank of Australia (RBA) will be announcing their interest rate decision on Tuesday, a key volatility driver for the Australian Dollar (AUD). Regardless whether there will be a hawkish or dovish statement made, or whether there will be an actual Interest Rate hike or not though interest rates is still expected to remain unchanged this round, markets generally tend to move during such decisions as any change in the wording regarding the exchange rate or inflation may have an impact on the AUD. Therefore, the team here at Essencefx urges readers to be early in picking up these trading cues in order to be able to catch a formation of any particular fresh trend.
On a more moderate note, the upcoming Purchasing Managers Index (PMI) decisions out of the U.K. and the September 2018 Employment Rate data out of Canada will also bring about some volatility in regards to these respective currencies on announcement date.
The currently uncertain Brexit negotiation continues to provide an uncertain outlook for the GBP as traders continue to decipher whether Britain can avoid a no-deal Brexit when it leaves the EU. While the EU prepares for the November summit where it hopes an agreement will be sealed to avoid tariffs and trade barriers, the Irish border issue remains the chief stumbling block to a deal, hence resulting in Prime Minister Theresa May suggesting that Brexit talks with the EU had reached an impasse. While this had weighed on the GBP as the risk of a 'no Brexit deal' scenario had increased, the GBP rebounded on Brexit hopes at the start of last week following comments from Britain’s Brexit secretary Dominic Raab that a deal with the European Union was still possible. Also, British’s ruling Conservative Party will be having their annual conference and traders will be looking at whether Theresa May would win over critics of her Brexit proposals. The GBP/USD exchange rate rally could be affected by any further remarks about Brexit.
While prices of cryptocurrency continue to spiral downwards, Bitcoin jumped higher last Wednesday as positive news from cryptocurrency exchange Gemini that they had received regulatory approval to list Bitcoin Cash (BCH) enticed buyers back into the market, although no launch date has been announced. Exchange listings normally boost crypto prices due to improved liquidity and customer reach. Additionally, a report from the Bank for International Settlements had suggested that government regulation has an impact on cryptocurrency prices, and tend to have a negative effect when focusing on general bans or treating virtual coins as securities, while the introduction of a specific, non-security legal framework tend to generate positive returns. 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 August 27 after more than a year of talks, thus setting the stage for Canada to sign on the trade pact that will revamp NAFTA though U.S. officials has expressed little optimism that a deal with Canada could be reached quickly, noting disagreements over dairy and dispute settlement provisions. 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 mid-term elections on November 6th. Investors may wait for the U.S. mid-term elections for any hints of change in Washington’s policy stance.
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.