WEEKLY REVIEW: 2nd April 2018
THE WEEK AHEAD
Market moving numbers: 2nd April – 6th April 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 first 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. This behaviour has been further validated following a better U.S Gross Domestic Product (GDP) release last week at 2.9% (Forecast: 2.7%). The U.S Dollar Index (DXY) only improved to the 89-ish level (from a low of 88-ish formerly), still largely down for the whole of 2018. The team here at EssenceFX will continue to track the implications of growing anti-trade sentiments and the effects it brings on the overall U.S Dollar specially given U.S President Trump's recently signed memorandum imposing wide-ranging tariffs of up to U.S$60 billion on China.
This week, the prime volatility trigger is viewed to be the U.S Nonfarm Payrolls (NFP) release which is scheduled to be announced at the end of the week. The growing anti-trade sentiments in the U.S would require at least a sustained NFP figure to preserve market optimism for further Interest Rate increases out of the U.S. In addition to the U.S NFP release, the Reserve Bank of Australia (RBA) will be announcing their Interest Rate Decision this week; a key volatility driver for the Australian Dollar (AUD). On a more moderate note, the upcoming Purchasing Managers Index (PMI) decisions out of the United Kingdom (U.K) and the March 2018 Employment Change out of Canada will also bring about some volatility in regards to these respective currencies on announcement date.
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 will first kick-off after a meeting between North Korea & South Korea which is scheduled to take place sometime towards the end of April 2018. Following this, a three-way summit is then scheduled to take place sometime in May 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 rise towards the high 1,330 level once again.
Over the past few weeks, 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) elections; 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 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.
Nonetheless for the case of the Europeans, a recent update the team of us views as pertinent to the strength of 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 sell other currency majors in absence of any further Interest Rate hikes for the year as it would be most certain for these currencies to weaken against the USD (pending further optimism on their own interest rate hikes) moving along this 2018.
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