WEEKLY REVIEW: 25th June 2018
THE WEEK AHEAD
Market moving numbers: 25th June – 29th 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 U.S related economic data a 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) increased to the 94 level last week and seems to be well on track to head towards the 95 level.
Two weeks ago, the FOMC raised the benchmark Interest rates from to 1.75% from 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 post the U.S FOMC and are pricing in for four Interest Rate hikes this year.
Politically, while the Trump and Kim meeting which took place in Singapore seemed to have fared 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" in 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. This month alone, a list of 818 Chinese goods amounting U.S$50 billion was confirmed to be hit by a 25% tariff, with the Trump administration pledging more (as much as U.S$100 billion) duties if China retaliated. This follows previously imposed tariffs on steel and aluminium imports. On China's end, they have formerly introduced their own tariffs on imports of 128 U.S products. There is now fresh speculation for U.S President Trump to revive the Trans-Pacific Partnership (TPP) to enact further pressure on China.
In addition for the month, U.S President Trump also took a hit at the European Union (EU) and stated that the U.S might be placing a 20% tariff on all cars coming into the U.S.. This follows the EU’s decision to slap tariffs on $3B worth of US goods in an effort to exert political pressure on the President.
This week, the team at EssenceFX views the U.S 2018 First Quarter (Q1) Gross Domestic Product (GDP) to bring about the most volatility for the week. In light of the various political and trade related pressures faced by the U.S, it would be interesting to see how the U.S 2018 Q1 GDP sustains this week; as this would also be indicative of how President Trump's economic policies has performed since his presidency. In addition to this, the United Kingdom (U.K) and Canada will also be releasing their GDP numbers this week. Specifically for the case of the New Zealand Dollar (NZD) and the Euro (EUR), there will be added volatility this week as we approach the Reserve Bank of New Zealand's (RBNZ) Interest Rate Decision and the June 2018 Consumer Price Index (CPI). On a more moderate note, there will be some volatility driven by the various sentiment related indicators out of Japan Leading Index, Europe's various IFO's, U.S Consumer Confidence, and Switzerland's ZEW this week.
In regards to global politics, 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 even further this week to the 1,270 level.
Over the past few months, prices of cryptocurrencies have dwindled since the crackdowns made in Korean Cypto Exchanges and amidst deteriorating market interest as indicated by falling market capitalization by major the cryptocurrencies. 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: "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 rumour and sell on fact" as currency majors have been following this trend so far, moving along 2018.
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