WEEKLY REVIEW: 22nd October 2018
THE WEEK AHEAD
Market moving numbers: 22nd October – 26th 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 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. Following robust U.S. economic data and indications from the Federal Reserve’s latest meeting that interest rates will continue to rise, the U.S Dollar Index (DXY) closed at 95.38 last Friday, though it came under downside pressure as bond yields increased after hawkish Federal Reserve minutes last Wednesday showed the central bank's conviction in gradually increasing interest rates in December and beyond. Nonetheless, the team here at EssenceFX will continue to track the implications of growing anti-trade sentiments and the effects it brings on the overall USD given that the U.S. and China are now fully engaged in a $360 billion trade war with threats to expand further.
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 four 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. Also, the disputes over the U.S. steel and aluminium tariffs and retaliatory moves by other countries have sparked 12 requests for adjudication to the World Trade Organization, signaling an escalation in global trade tensions. 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 expected to hold a second summit with Kim after the U.S. congressional elections in November to continue their efforts to build out a pathway for denuclearization. Nonetheless, on October 16, North Korean state media reportedly slammed the U.S. for its attempt to maintain sanctions against Pyongyang, accusing Trump of blocking progress in inter-Korean relations. The declaration threatens to upset the negotiations between Washington and North Korea. The rekindled tensions with North Korea could likely lead to a positive for gold in the weeks to come, causing the commodity to surpass the key $1,200 psychological mark to the 1,226.08 mark last Friday.
On Friday, the U.S. preliminary reading of third quarter Gross Domestic Product growth will be one of the most important indicators monitored by foreign exchange traders in determining this week's dominant trend for currency pairs against the USD. 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, there will be four central banks’ monetary policy decisions which traders are anticipated to monitor closely this week, namely the interest rate decision of the European Central Bank, the Bank of Canada, Sweden’s Riksbank and Norway’s Norges Bank.
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). Though the latest Brexit optimism had seemingly placed GBP on a firm footing, however, there was a quick reversal seen after the underwhelming Brexit progress at the EU Summit. While progress was made on some minor fronts such as the possibility of an extension for the transition period, some larger issues remain contentious. European Council President Donald Tusk and Germany’s chancellor Angela Merkel have warned of a no-deal Brexit as EU leaders sought to unblock stalled negotiations with Britain over the issue of how to avoid new visible border checks between Northern Ireland and the Republic of Ireland after Brexit, consequently weighing on the GBP as the risk of a 'no Brexit deal' scenario had increased. However, the GBP found relief at the end of the week on reports that the U.K. government was prepared to drop its Irish border demands as a way to help ease the path towards securing an agreement with the EU. The GBP/USD exchange rate rally could also 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/Canadian Dollar (CAD) pair as the BoC will be deciding on its Overnight Rate on Wednesday in which the team of us here at Essencefx views is expected to bring about the most trading volatility as the BoC is expected to continue its gradual tightening path and raise interest rates from 1.50% to 1.75%. While the CAD has been bearish following the downtrend of oil prices, the CAD may be able to strengthen if the BoC accompanied its rate hike with a hawkish outlook.
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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