THE WEEK AHEAD 

Market moving numbers: 15th October – 19th 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. However, despite indications from the Federal Reserve that interest rates will continue to rise, the U.S Dollar Index (DXY) came under downside pressure to close at 95.23 last Friday after U.S. Treasury yields retreated from recent peaks and President Donald Trump renewed criticism of the Federal Reserve and its interest rate policy. The USD also extended losses on the weaker than expected inflationary figures after the U.S. September Consumer Price Index (CPI) report showed a weaker-than-expected increase of only 0.1%, down from the 0.2% increase in August.

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 is being criticized by Trump as being too aggressive. 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 after Trump warned that there was much more he could do to hurt China’s economy further, hence showing no signs of backing off an escalating trade war. Trump had imposed tariffs on nearly US$200 billion of Chinese imports last month and then threatened more levies if China retaliated, to which China did by imposing tariffs on about US$60 billion of U.S. import. 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. While the Singapore summit, where Trump and Kim agreed to work towards the complete denuclearization of the Korean Peninsula, has since been criticized for a lack of detail on when or how Pyongyang would renounce nuclear weapon, Trump and Kim have planned for a second summit to continue their efforts to build out a pathway for denuclearization with Trump saying that the second summit will take place after the U.S. congressional elections on November 6. This latest move in the diplomacy with Pyongyang could translate to a negative for gold in the weeks to come, nonetheless the commodity continues to surpass the key $1,200 psychological mark to reach the 1,222.13 mark last Friday.

On Monday, the U.S. Retail Sales and Empire State Manufacturing Index will be one of the most important indicators monitored by foreign exchange traders. The outcome of these indicators sets the tone for the rest of the week, in which a higher than expected reading is generally bullish for the USD, while a lower than expected reading should be taken as bearish for the USD. Aside from this, in absence of more substantial U.S related market data, there will be two Monetary Policy Meeting minutes releases which traders are anticipated to monitor closely this week, namely the minutes of the FOMC September meeting and the Reserve Bank of Australia’s October Meeting.

The currently uncertain Brexit negotiation continues to provide an uncertain outlook for the Great Britan Pound Sterling (GBP) as traders continue to decipher whether Britain can avoid a no-deal Brexit when it leaves the European Union (EU). Despite initial reports that Britain could not agree a divorce deal with the EU without a framework pact on future relations, thus challenging the bloc which also said that it cannot move on talks until London does, but the GBP added gains against the USD last Wednesday on optimism that the EU and Britain can agree on a deal for Brexit soon. This follows reports that the two sides had made progress in negotiations over the Irish border, a key hurdle in reaching a Brexit deal.  The issue on the Irish border must be cleared before this week’s EU economic summit on 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. The GBP is poised to strengthen should a deal be struck at the summit and could similarly suffer a sell-off if the talks break down.

Another closely-monitored direct currency pair would be the USD/Canaduan Dollar pair as investors look at the Canadian CPI and Retail Sales figure on Friday for further clues on when and how fast the Bank of Canada (BoC) will raise interest rates as a pick-up in inflation should boost expectations over further interest rate hikes. Although the BoC is almost certain to raise interest rates in October, the strength of next week’s numbers could help determine whether the BoC will shift to a more aggressive rate path or stick to its gradual policy.

Prices of cryptocurrency continue to spiral downwards. 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.

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