WEEKLY REVIEW: 24th September 2018
THE WEEK AHEAD
Market moving numbers: 24th September – 28th 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 94.22 as investors set aside concerns over an escalating trade war between the U.S. and China.
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, both sides are now discussing how to pursue talks towards zero tariffs but the European Commission is awaiting a negotiating mandate from EU member states. The markets remain worried about the heated dispute between the U.S. and China. Though the U.S. and China have already levied 25% duties on $50 billion worth of each other’s goods in an intensifying trade row, in the latest development, Trump followed through with 10% tariffs on US$200 billion in imports from China which will take effect on September 24 through the end of the year, before increasing to 25% in January 2019. Trump has also threatened to pursue tariffs on another US$267 billion of imports if China retaliates. In retaliation to Trump’s decision to impose duties, China announced tariffs on another US$60 billion of U.S. goods ranging from liquefied natural gas to certain types of aircraft and has filed a complaint to the World Trade Organization against the U.S. planned import tariffs on US$200 billion worth of Chinese goods. China has also canceled upcoming trade talks with the U.S. and the Wall Street Journal reported last Sunday that the Chinese government may also limit American companies from exporting products from China if the Trump administration goes ahead with the additional tariff. 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 the North American Free Trade Agreement (NAFTA) . Nonetheless, the Peso still faces uncertainty until the 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. 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. In a meeting in Pyongyang this week between Kim and South Korean President Moon Jae-in in an attempt to push forward their peace process, as well as pave the way for a second summit between Trump and Kim, Kim offered to permanently dismantle the country’s main nuclear site only if the U.S. makes concessions first. While analysts says that it is far from clear that Kim had made concessions that would make a summit an attractive proposition for the U.S., but Trump responded positively on Twitter by calling the news “very exciting”. This latest move in the cautious diplomacy with Pyongyang has translated into a negative for gold, causing the commodity to fall below the key $1,200 psychological mark to the 1,198.87 mark last Friday.
This week, our top three potential 'rebalancers' the team here at EssenceFX picked out would be the USD, the Pound Sterling (GBP), and the Canadian Dollar (CAD) which are set to be impacted by their countries crucial Gross Domestic Product (GDP) data release due this week. In addition, the Reserve Bank of New Zealand (RBNZ) is set to announce their Interest Rate Decision on Wednesday.
On a related note, this week we are set to witness a potential interest rate hike out of the FOMC in regards to the American economy, easily setting this to be the main news to drive market volatility for the week. Markets are pricing in an increase of 25 basis points which would bring up the benchmark Fed Funds rate to between 2.00% and 2.25%. While this anticipation has been heavily priced in by the markets, the RBNZ interest rate decisions which are set to take place this week may also trigger the USD strengthening towards these country's favor if dovish statement are presented on Interest Rates.
The main release for the CAD in the week ahead is the July GDP data out on Friday, September 28. 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 CAD 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 GBP as traders continue to decipher whether Britain can avoid a no-deal Brexit when it leaves the EU. While the EU prepares for the November summit where it hopes an agreement will be sealed, the Irish border issue remains the chief stumbling block to a deal, hence resulting in Prime Minister Theresa May suggesting the no deal Brexit outcome is perhaps now more likely than actual compromise. Consequently, this has weighed 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.
While prices of cryptocurrency continue to spiral downward, the cryptocurrency has experienced a gain towards the end of the week with bitcoin, ethereum and ripple rising in price by between 5% and 100% on Thursday. The vast majority of the support going into the weekend came from renewed interest in the cryptocurrency market following Ripple’s XRP rally that came off the back of news that a Saudi and U.S bank will be adopting Ripple’s platforms for cross-border transaction. On the Bitcoin side, hopes of the U.S. Securities and Exchange Commission (SEC) finally approving a Bitcoin exchange-traded fund also provided much needed support, with the SEC currently collecting inputs on various questions the SEC has before concluding its review. 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 after more than a year of talks, thus setting the stage for Canada to sign on the trade pact that will revamp NAFT though White House economic adviser, Kevin Hasett, said last Saturday that the U.S. is getting closer to move forward on its trade deal with Mexico without Canada. 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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