WEEKLY REVIEW: 17th September 2018
THE WEEK AHEAD
Market moving numbers: 17th September – 21th September 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) dropped on a Friday-to-Friday basis to close at 94.95 after weaker-than-expected U.S. inflation data, with the currency already sagging on signs of reduced trade tensions between the U.S. and China. The U.S. dollar weakened after the U.S. consumer price index (CPI) rose just 0.2% in August, and less than the projected 0.3%. Nonetheless, investors remain jittery about U.S. trade relations after U.S. President Donald Trump said he could hit China with more tariffs and alluded to trade talks with Japan while negotiations with Canada to revamp the North American Free Trade Agreement (NAFTA) continue.
On August 1, the FOMC voted unanimously to keep the target range for its benchmark interest rates at 1.75% to 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 one more rate hike in September 2018 and a likelihood of another rate hike in December, which would then bring the total number of rate hikes to 4 in 2018 though this move was 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,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, a deal between the two nations is not likely to be reached as soon as the White House would like after little progress was made in trade talks between European and American officials on Monday. Nonetheless, though Robert Lighthizer, the U.S. trade representative, called the talks constructive, further negotiations were set for the end of the month. The markets remain worried about the heated dispute between the U.S. and China. In regards to China, China will officially place a request with the World Trade Organization (WTO) next week for permission to impose US$7 billion a year in sanctions on the U.S. for Washington’s non-compliance with a ruling in a dispute over U.S. dumping duties, as part of an apparent response to remarks from Trump to impose tariffs on almost all China imports, or about US$467 billion in goods. Furthermore, after Treasury Secretary Steven Mnuchin invited his Chinese counterparts to sit down for a new round of trade talks, Trump undermined that very idea. 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 North American Free Trade Agreement (NAFTA). Nonetheless, the Peso still faces uncertainty until the North American Free Trade Agreement (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. While 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, Kim Jong-Un has recently sent a letter to the White House requesting to meet with Trump, signaling an attempt to revive stalled diplomatic efforts between Washington and Pyongyang. This latest move in the cautious diplomacy with Pyongyang has translated into a negative for gold, causing the commodity to fall even further this week to the 1,193.37 level.
On Thursday, the Philadelphia Federal Reserve Manufacturing Index will be one of the most important indicators monitored by foreign exchange traders. The outcome of this Index, which rates the relative level of general business condition in Philadelphia, provide a second look at manufacturing activity in which a level above zero for the index indicates improving conditions and a level below zero indicates worsening conditions. While the forecasted index for August is 15.3, a higher than expected reading is generally bullish for the USD, and 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 Interest Rate releases which traders are anticipated to monitor closely, name the Bank of Japan (BoJ) and Swiss National Bank (SNB) Interest Rate decision.
The main release for the New Zealand Dollar (NZD) in the week ahead is the second quarter Gross Domestic Product data out on Wednesday, September 19. The economy is expected to grow by a quarterly growth rate of 0.8% in in the second quarter of 2018, compared to its growth rate of 0.5%. GDP is an important factor for the NZD because it is the primary indicator of the economy’s health, 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 currently uncertain Brexit negotiation continues to provide an uncertain outlook for the Great Britain Pound (GBP) as traders continue to decipher whether Britain can avoid a no-deal Brexit when it leaves the EU. While EU’s Michel Barnier’s recent optimism that a deal could be struck by early November had seemingly placed GBP on a firm footing, however, there was a quick reversal seen after a group of members of parliament in Theresa May’s ruling Conservative Party disagreed with her Brexit proposals for Britain to remain in a Free Trade zone for goods with the EU after it leaves the bloc, 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.
Another closely-monitored direct currency pair would be the USD/CAD 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 will raise interest rates as a pick-up in inflation should boost expectations over further interest rate hikes.
Prices of cryptocurrency continue to spiral downwards. Bitcoin failed to extend its rebound this week after climbing above US$6300 on Tuesday following New York state’s Department of Financial Services approved Gemini Trust Company’s and Paxos Trust Company’s dollar-linked digital currencies, the first stablecoins to get the nod from the regulator. Bitcion and other major cryptocurrencies prices plunged across the board on Wednesday as investor sentiment was shaken amid the announcement by Wall Street on actions taken against companies involved with cryptocurrencies and intensifying scrutiny of the digital tokens. 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 last Monday after more than a year of talks, thus setting the stage for Canada to sign on the trade pact that will revamp NAFTA. 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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