THE WEEK AHEAD 

Market moving numbers: 5th November – 9th November 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 after the U.S. nonfarm payroll employment data exceeded forecasts, thus keeping the Federal Reserve on track to raise interest rates in December, the U.S Dollar Index (DXY) rose to close at 96.50 last Friday. 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 a senior official in the Trump administration last Friday dismissed as untrue a media report that said Trump was preparing a possible trade deal with China after Trump and Chinese President Xi Jinping spoke on the phone regarding trade on Thursday. Bloomberg news also reported that Washington was preparing to announce tariffs on all remaining Chinese imports by early December if talks between Trump and President Xi at the Group of 20 leaders summit in Argentina at the end of November fail to ease the trade war. Trump had already imposed tariffs on US$250 billion worth of Chinese goods and then threatened more levies if China retaliated, to which China did by imposing retaliatory duties on US$110 billion worth of U.S. goods. 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 (WTO) 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 place despite the new U.S.-Mexico-Canada Agreement (USMCA) trade pact with Mexico and Canada. Nonetheless, Mexico and Canada have recently said ahead of the USMCA signing ceremony planned for November 29 or 30 that they will not sign the new USMCA unless the U.S. removes steel and aluminum tariffs its two continental neighbour. Also, the U.S. steel and aluminum tariffs have attracted seven requests for WTO adjudication as well as a range of criticism, at a fractious WTO dispute settlement meeting, while the U.S. hit back with legal actions against its critics. This tariff dispute signals 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, following Secretary of State, Mike Pompeo’s latest trip to North Korea, special representative to Pyongyang, Stephen Biegun told reporters that he is expected to begin working-level talks on denuclearization with his North Korean counterpart, Deputy Foreign Minister Choe Son Hui; but several former U.S. officials say North Korea has yet to respond to requests for follow-on talks with Biegun, a sign that Pyongyang is dragging its heels on negotiations. Nonetheless in a meeting last Monday with his South Korean counterpart Lee Do-hoon to discuss North Korea nuclear issues, Biegun expressed confidence about achieving North Korea’s nuclear disarmament, despite worries about the slow pace of nuclear diplomacy in recent weeks. This latest move in the diplomacy with Pyongyang could translate to a negative for gold in the weeks to come, nonetheless the commodity continues to surpass the key $1,200 psychological mark to reach the 1,232.32 mark last Friday.

On Monday, the U.S. Institute of Supply Management (ISM) Non-Manufacturing Purchasing Managers' Index (PMI) report will be one of the most important indicators monitored by foreign exchange traders as it is an indicator of the overall economic condition for the non-manufacturing sector. 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, in absence of more substantial U.S related market data, there will be the U.S. mid-term elections on Tuesday and three major central banks’ Monetary Policy Meeting minutes releases which traders are expected to monitor closely this week, namely the minutes of the FOMC November meeting, the Reserve Bank of Australia’s November Meeting and the Reserve Bank of New Zealand’s November meeting. On Monday, the Reserve Bank of Australia (RBA) will publish its latest interest rate decision along with the policy statement. The Reserve Bank of New Zealand (RBNZ) will then publish its interest rate decision on Wednesday. While the team expects the RBA to keep rates unchanged at 1.50% and expects RBNZ to maintain rates at 1.75%, if both central banks present the market with dovish statements or indicate that it is extending its outlook for an eventual interest rate rise, hence implying that the slowing economy will continue to need low interest rates to stimulate growth, a further fall in both the Australian Dollar (AUD)/USD and New Zealand Dollar (NZD)/USD can almost be certain.

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 Brexit talks had remained at an impasse over the Irish border disagreement, the latest Brexit optimism stemming in part to the new British proposals for resolving the disagreement over the future of the Irish border and on reports that the U.K. and the EU have agreed to a deal that would give U.K. financial services companies access to EU markets after Brexit had seemingly placed GBP on a firmer footing. Hence, 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 and could similarly suffer a sell-off if the talks break down.

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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