WEEKLY REVIEW: 11th June 2018
THE WEEK AHEAD
Market moving numbers: 11th June – 15th June 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 three months, even negative United States (U.S) Dollar (USD) data did not deter the USD from sustaining a steady uptrend. Forecasters have been attributing this occurence 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. Despite still being on a general uptrend, the U.S Dollar Index moderated a little last week to the 93 level.
Last week, the Eurozone CPI came in sharply ahead of expectations, rising to 1.9% from 1.2% previously. This was followed by better-than-expected economic data from the U.S where Personal Spending, Core Personal Consumption Expenditures (PCE), ISM Manufacturing Purchasing Managers Index (PMI) and the monthly jobs report (average hourly earnings) all came in ahead of expectations. The United Kingdom (UK) scored a hat-trick of better-than-expected PMIs with the Manufacturing, Construction and Services sectors all showing decent numbers. Meanwhile for the case of Australia, the team here at EssenceFX notes on the stronger-than-expected Retail Sales and Gross Domestic Product (GDP); the latter showing a solid 1% growth.
Apart from economic data, EssenceFX notes that the market was also strongly focused on the G7 Summit which took place last week in Canada. The 2-day “fractious” summit wrapped up with leaders of G7 economies signing a joint statement acknowledging the importance of mutually beneficial trade where they vowed to tackle protectionism and cut trade barriers. However, U.S President Trump dropped the bomb shortly before leaving the summit, disavowing a joint statement the U.S had formerly agree to. Trump lashed out at Canada’s Prime Minister Trudeau and accused his G7 counterparts and other nations of "unfair" trade practices and for treating the U.S like a "piggy bank". He fired off several tweets, describing Canada's Prime Minister Trudeau as a dishonest and weak leader.
This week is expected to be a rather eventful one with several Interest Rate Policy related decisions looming about. The largest volatility driver as opined by the team here at Essence FX would be from these three major central banks meetings i.e. the FOMC, Bank of Japan (BoJ) and European Central Bank (ECB) along with Inflation numbers and Retail Sales data from the U.S. EssenceFX opines that the market is expecting another Interest Rate Hike by the U.S Federal Reserve, following the last hike carried out on March 2018 while no new actions are expected from BoJ and ECB. For the ECB, there seems to be a consensus view in the market of tapering in Q4 and for a rate hike no early than mid-2019. Meanwhile on top of the major policy meetings this week, we will also have Economic sentiment data for the Eurozone, Australian key employment numbers along with UK industrial production numbers to look forward to.
The anti-trade sentiments and geopolitical concerns still continue to remain apparent across global markets. The team here at EssenceFX will continue to track the implications of these anti-trade sentiments and geopolitical concerns and analyze the effects it stands to bring on the USD. The recent G7 Summit showed a growing divide between Trump and other G7 leaders on trade, indicating a looming threat of a global trade war. While the U.S President has been quiet on the US-China trade row in recent days as he turned his focus towards the G7 meeting in Canada and upcoming summit with North Korea, the noise could resurface once those two distractions are behind him. Trump to date, has signed a memorandum imposing wide-ranging tariffs of up to U.S$60 billion on China while China's President Xi Jinping has announced tariffs to be imposed on 128 U.S goods. This led to President Trump's further announcement for a potential U.S$100 billion worth of additional tariffs to be imposed on China. Recently, China warned that all commitments so far in talks with the U.S. over trade will be withdrawn if the president carries out his threat to impose tariffs. While both the U.S. and China reported some progress in discussions about how to reduce China’s $375 billion goods-trade surplus with the U.S., President Donald Trump’s plan to slap tariffs on $50 billion of Chinese imports has thrown the talks into turmoil.
In regards to global politics, following the harsh exchange of words which has formerly taken place between United States (U.S) and North Korea as reflected by the leaders of the two countries, there is now talks of a three-way summit which is scheduled to take place between South & North Korea and The U.S. The South Korean President, Moon Jae-in noted that nuclear disarmament is not something that can be realised through an agreement merely between South and North Korea alone. President Moon views it to be an agreement which requires a U.S guarantee that normalisation of some economic rationalization between the U.S and North Korea will take place following any disarmament. This summit kicked-off following the meeting between the North Korean & South Korean Presidents on 26 April 2018. Following this, U.S President Trump is scheduled to meet North Korean President Kim Jung-un in Singapore this week (12th of June 2018). This has translated into a positive for gold, on top of the various other anti-trade sentiments implemented by the U.S, causing the commodity to range around the 1,300 level.
Over the past few months, prices of cryptocurrencies have dwindled since the crackdowns made in Korean Cypto Exchanges. In addition to this, there seems to be a growing negative tone by global regulators. 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 favoured 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. The upcoming GE highlight would be on Mexico which falls on July 1, 2018. A recent poll conducted by Mexican daily Reforma suggested Lopez Obrador, or better known as AMLO is the clear favorite to become Mexico's next president. He is a bombastic populist and an outspoken critic of Donald Trump. 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: "Can the U.S still hike Interest Rates this year?" Since the answer currently remains as somewhat 'more certain' (post Powell), we urge you to pick out on early trading signals to "buy on rumour sell on fact" as currency majors have been following this trend so far, moving along this 2018.
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