WEEKLY REVIEW: 8th October 2018
THE WEEK AHEAD
Market moving numbers: 8th October – 12th 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 robust U.S. economic data and indications from the Federal Reserve that interest rates will continue to rise, the U.S Dollar Index (DXY) climbed to close at 95.60 last Friday, though it came under downside pressure after the U.S. economy added 134,000 jobs during last month, which was less than initially forecasted. 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. With U.S. tariffs now on US$250 billion in Chinese annual exports, about half the total that comes into the U.S. market, and Trump threatening to target the other half, relations with Beijing have deteriorated. Furthermore, the new U.S.-Mexico-Canada Agreement (USMCA) that updates the existing continental free trade pact iterates the U.S.’s strategy for countering China - by essentially forbidding any free trade deals with China by any of the USMCA partners. Trump has also made good on several months of threats and authorized tariffs of 25% on Canadian steel imports and 10% on aluminum in June, hence resulting in Canada imposing tariffs against U.S. exports and disputing the 232 tariffs on steel and aluminum before the World Trade Organization in retaliation to the U.S. tariffs on steel and aluminum. Though at that time, Trump had tweeted that tariffs would only come off if a new and fair NAFTA agreement is signed, Trump’s tariffs on steel and aluminum will remain in force despite a new trade pact with Mexico and Canada. A decline in U.S. financial markets could be an impact that could occur as the trade wars escalates.
In regards to global politics, it has been four 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. Nonetheless at a summit with the South Korea’s President Moon Jae-in last month, while the Kim had offered to shut down its main Yongbyon nuclear complex if Washington takes corresponding measures, North Korea has ruled out dismantling its nuclear arsenal in exchange for the U.S. declaring an end to the Korean War, accusing the Trump administration last Tuesday of demanding too much but offering too few concessions in its negotiations over the terms of denuclearizing the North Korea. The rekindled tensions with North Korea could likely lead to a positive for gold in the weeks to come, causing the commodity to surpass the key $1,200 psychological mark to the 1,202.6 mark last Friday.
This week, the monthly U.S. Consumer Price Index (CPI) will be one of 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 USD'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.
The European Central Bank (ECB) will be publishing its last meeting minutes this Thursday. Investors will be looking at this meeting minutes for comments about wages, inflation, and future monetary policy and for signs that policymakers are becoming more confident about the Eurozone’s inflation outlook. 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, but if the institution decides to raise interest rates earlier, this should boost the Euro.
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. Despite Theresa May’s speech at the start of last week that confirming a no deal Brexit could take place in March 2019, but the GBP picked up towards the end of the week on reports that EU negotiators and Britain were moving closer to an agreed position on a deal for Brexit and a way to avoid extensive border checks in Ireland ahead of the European summit on October 17-18. The issue on the Irish border must be cleared before October 17-18 so as for EU to determine that enough progress is made for moving on the emerging summit in November, when everything would be finalized. The GBP/USD exchange rate rally could be affected by any further remarks about Brexit.
Prices of cryptocurrency continue to spiral downwards. Despite the rebound last week, bitcoin remains locked in a bear market that is unlikely to let up anytime soon. Recent price data has shown weaker rebounds and lower highs for the digital currency, which means investors can expect downside pressure to persist. 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, after renegotiating NAFTA for more than a year, the Mexico and the U.S. announced a bilateral trade pact on August 27 while the U.S. and Canada managed to forged a last minute deal on September 30 to salvage NAFTA as a trilateral pact with Mexico known as the U.S.-Mexico-Canada Agreement. 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.