WEEKLY REVIEW: 18th June 2018
THE WEEK AHEAD
Market moving numbers: 18th June – 22th 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) news and 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 FOMC raised the benchmark Interest rates from to 1.75% from 2.0% previously. While this move was largely anticipated, the team here at EssenceFX notes on the sustenance in the USD's strength as reflected by the U.S Dollar Index which rose from the 93 level to the 94 level. This goes against the typical 'sell on fact' move usually seen which indicates that markets took strong cue from the regulators and are pricing in for almost a confirmed four Interest Rate hikes this year.
Politically, while the Trump and Kim meeting which took place in Singapore last week seemed to have went well, the U.S are still in a pretty rattled relationship with China and Canada. Formerly, President Trump quoted that Canadian Prime Minister Justin Trudeau to be a dishonest and weak individual and claimed that the Canadian Prime Minister made "false statements" inm regards to US endorsing a G-7 communique. In regards to China, the American President signed a memorandum imposing wide-ranging tariffs of up to U.S$60 billion on China with a list of U.S$50 billion in Chinese goods to target with 25% tariffs introduced last week, pledging more duties if China retaliated. This follows previously imposed tariffs on steel and aluminium imports. China has since retaliated with the introduction of it's own tariffs on imports of 128 U.S products. Following this, U.S President Trump further rattled markets by announcing the possibility of an additional U.S$100 billion worth of tariffs to be imposed against China. There is now fresh speculation for U.S President Trump to revive the Trans-Pacific Partnership (TPP) to enact further pressure on China.
This week is expected to be a rather eventful one with two key Interest Rate Policy related decisions looming about. The largest volatility driver as opined by the team here at Essence FX would be from the Bank of England's (BoE) Interest Rate Decision. A number of committee members in the BoE have favoured a rate hike and now that the U.S has increased Interest Rates, it now adds on to speculation that the BoE might well follow suit or at least present the market with a more 'hawkish' tone. The Swiss National Bank (SNB) is also expected to announce their Interest Rate decision this week which could bring about some opportunity for some 'buy on rumour' play following the currencies rise to monthly highs last week; indicating some potential correction to follow.
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. This week, the will be a joint meeting between European Central Bank (ECB) President Mario Draghi, along with Bank of Japan (BoJ) Governor Haruhiko Kuroda and Federal Reserve Chairman Jerome Powell who are due to participate together for a panel discussion at the ECB forum in Portugal.
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. U.S President Trump has successfully met up with North Korean President Kim Jung-un in Singapore on the 12th of June 2018. This has translated into a negative for gold, causing the commodity to fall to the 1,280 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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