WEEKLY REVIEW: 16th July 2018
THE WEEK AHEAD
Market moving numbers: 16th July – 20th July 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) continued to rise for the week to closed at 94.91 supported by the June 2018 Core monthly CPI which met forecast at 0.2%.
Last month, the FOMC raised the benchmark Interest rates from to 1.75% from 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 four Interest Rate hikes this year. 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, while the Trump and Kim meeting which took place in Singapore in mid-June 2018 seemed to have fared well, the U.S are still in a pretty rattled relationship with China and Canada. In regards to China, the U.S. has imposed 25% duties on US$34 billion worth of Chinese goods with a further US$16 billion worth of Chinese exports at risk, and China followed up by promptly imposing duties of its own on the same value of U.S. products. A second tranche of $16 billion in products is under review and could be soon added to the U.S. measures. In a significant escalation of the trade war with China, Trump's administration released a list of $200 billion in Chinese goods subject to 10% tariffs on Tuesday, with the Asian nation vowing to retaliate. Nonetheless, tensions between the U.S and China eased after U.S. Treasury Secretary Steven Mnuchin said on Thursday that talks between the two nations could be reopened if Beijing is willing to make significant changes. 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. The European Commission has told the US Commerce Department that if the U.S. persists with planned tariffs on European Union cars and auto parts, the EU would enact counter-measures that would hit a wide range of U.S. exports to the EU. A decline in U.S. financial markets could be an impact that could occur as the trade wars escalates. The Mexico presidential elections last month also marks a new stage for the country's relations with the U.S. Lopez who has been highly critical of Trump in a time where relations between the two neighbors were increasingly strained, struck a more conciliatory tone regarding Trump in his post-election speech. Despite his affable approach towards U.S., Lopez’s victory did little for the Mexican Peso which fell against the USD. The Peso still faces uncertainty until the North American Free Trade Agreement (NAFTA) is resolved.
July 2018 will be an eventful month for international politics. On July 12, the NATO allies conversed on the future of the Western alliance amidst Trump’s diatribes against the Europeans. Days later, on the 16th, EU leaders will attend the 20th China-EU high summit in Beijing, with the international trade order at stake. As the trade wars has now kicked in triggered by Trump’s tariffs on steel and aluminium, and threats of new duties on cars, the China-EU summit provides an opportunity for EU and Chinese leaders would like to put on a unified front against protectionism that could take the world into another great depression.
Further in regards to global politics, Secretary of State Mike Pompeo's delegation was in Pyongyang last week to continue talks on denuclearizing the Korean peninsula. While the Trump administration shot back at North Korea on Thursday, sending evidence to a U.N. committee showing that North Korea violated U.N. sanctions through illegal transfers of refined petroleum at sea, Trump released a letter he recently received from North Korean leader Kim Jong Un on Friday and praised the progress in talks with Pyongyang. However, the letter fails to mention anything related to denuclearization and despite Trump's claims to the contrary, Kim has still not publicly declared what he will or will not do in regard to his nuclear weapons program. The rekindled tensions with North Korea and coupled with the escalating trade war between U.S. and China, could likely lead to a positive for Gold in the weeks to come. Nonetheless, gold fell further to the 1,241 level on Friday as expectation of higher interest rates in the U.S continue to stand as the main factor which drives the market.
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.
The main release for the Australian Dollar (AUD) in the week ahead is the June 2018 Employment Change data out on Thursday, July 19. Aussie jobs are expected by the markets to have increased by 17,000 in June 2018 and the employment rate to hold steady at 5.4%. Unemployment is an important factor for the AUD because it impacts the rate of wage growth and consequently, demand in the economy and inflation, that any deviation from the estimated number will likely move the currency with a beat on expectations aiding gains, and a miss prompting losses.
The overhang of Brexit continues to provide an uncertain outlook for the Great Britain Pound (GBP). The initial response to Prime Minister (PM) Theresa May’s soft Brexit proposal had seemingly placed GBP on a firm footing. However, there was a quick reversal seen after the proposal led to the resignation of key MPs in PM May’s cabinet, most notably, Foreign Secretary Boris Johnson and Brexit Minister David Davis, consequently weighing on the GBP as the risk of a 'no Brexit deal' scenario had increased. The GBP/USD exchange rate rally could also be affected by any further remarks about Brexit and President Trump's proposed U.S.-UK trade deal in conjunction with his two-day visit to the UK last Thursday and Friday.
Another closely-monitored direct currency pair would be the USD/CAD pair as investors look at the Canadian CPI and Retail Sales figure for further clues on when and how fast the Bank of Canada will raise interest rates as a pick-up in inflation should boost expectations over further interest rate hikes.
While prices of cryptocurrency continue to spiral downwards, more potential gains could be expected as India softens its stance on cryptocurrencies with a total ban now looking unlikely. So while the positive price action infuses some optimism into the market, volatility is expected to remain elevated. 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 North American Free Trade Agreement negotiations with Canada and the U.S., which has snagged notably owing to U.S. demands to increase American content installed in duty-free autos. However, Manuel Lopez, who once referred to President Trump as “erratic and arrogant”, has struck a conciliatory tone toward after his victory by thanking Trump for his congratulatory message and declaring his desire for friendship and mutual respect. Lopez has vowed to work with the U.S. to revise the trade pact. Should there be more headlines about the intentions of the new president, volatility might arise on MXN. 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.
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