WEEKLY REVIEW: 9th July 2018
THE WEEK AHEAD
Market moving numbers: 9th July – 13th July 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 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 USD fell on Friday to 93.96 as U.S. tariffs on Chinese imports took effect. Also, there was further pressure on the USD despite data showing that Nonfarm Payrolls (NFP) increased by 213,000 last month. This was mainly attributed to the increase in initial June 2018 Unemployment claims which rose unexpectedly coupled with a fall in the June 2018 Avarage Hourly Earnings.
Last month, 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 in regards to the USD and are pricing in for four Interest Rate hikes this year.
Politically, while the Trump and Kim meeting which took place in Singapore in mid-June 2018 seemed to have fared well, the U.S are still in a pretty rattled relationship with China and Canada. Last Sunday, Canada’s list of retaliatory tariffs against the U.S. came into effect after the Trump administration slapped its own tariffs on Canadian-made steel and aluminum. In regards to China, the dollar fell as the U.S. tariffs on $34 billion worth of China goods took effect on Friday, while China’s commerce ministry said it had been forced to retaliate, meaning $34 billion worth of imported U.S. goods also face 25% tariffs. The Trump administration is currently reviewing another round of tariffs on USD$16 billion in Chinese goods. A decline in U.S. financial markets could be an impact that could occur as the trade wars escalates. The Mexico presidential elections last Sunday will also mark a new stage for the country's relations with the U.S. Lopez who has been highly critical of Trump in a time where relations between the two neighbors were increasingly strained, struck a more conciliatory tone regarding Trump in his post-election speech. Despite his affable approach towards U.S., Lopez’s victory did little for the Mexican Peso which fell against the U.S. dollar. The Peso still faces uncertainty until North American Free Trade Agreement is resolved.
In addition for June 2018, 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 USD$3 billion worth of US goods in an effort to exert political pressure on the President. However, it was reported on Wednesday that the U.S. ambassador to Germany had told German car bosses that Trump would suspend threats to impose tariffs on cars imported from the EU if the bloc lifted duties on U.S. cars.
In regards to global politics, in less than a month after the successful meet up between Trump and North Korean President Kim Jung-un in Singapore which Trump talked about opening a new chapter between the U.S. and North Korea, the relationship between the two nations has taken a tense and hostile turn. In a fiery escalation, North Korea accused the U.S. of having a “gangster-like mindset” in negotiations over denuclearization. The rekindled tensions with North Korea and coupled with the escalating trade war between U.S. and China, could likely lead to a positive for Gold in the weeks to come. Nonetheless last week, gold fell further to the 1,255 level as U.S Interest Rate Hike optimism continues to outweigh the afromentioned geopolitical factors.
This week, the monthly Consumer Price Index (CPI) will be one if the most important indicators monitored by foreign exchange traders. The release and revisions of the CPI figure by the Bureau of Labor Statistics can produce swings in the USD's value to other foreign currencies. While a low inflation does not guarantee a favorable exchange rate for a country, but an extremely high inflation rate is likely to impact a country’s exchange rates with other nations negatively.
Another closely-monitored direct currency pair would be the USD/CAD pair, seeing that the Bank of Canada (BOC) is widely expected to raise interest rates this week. While the unemployment rate suggested a positive sign for the Canadian economy, Canada is embroiled in a trade war with the U.S. that threatens to escalate and this remains a headache for policy makers. Also, the Canadian government is still in tough negotiations over a new NAFTA agreement, with the U.S. threatening to pull out if it is not given major concessions. Ideally, the Bank of Canada (BoC) should hold off on a rate hike until the NAFTA issue is resolved but as the Federal Reserves is expected to raise rates at least twice this year, if the BoC does not follow suit, the Canadian Dollar (CAD) could fall against the USD.
The European Central Bank (ECB) will be publishing its last meeting minutes this Thursday. While the ECB has outlined its intention to end its quantitative easing stimulus program by the end of 2018 and hold interest rates until the second half of 2019, but if the institution decides to raise interest rates earlier, this should boost the Euro. However, Brexit could hurt the Euro zone economies, with two ministers quitting the government early this week.
While prices of cryptocurrency continue to spiral downwards, the market showed signs of improvement last week. For the first time in about a month, the overall market climbed 14% to a USD$267 billion market cap. So while the positive price action infuses some optimism into the market, volatility is expected to remain elevated. 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. Mexico saw Andres Manuel Lopez Obrador winning its presidential election last Sunday, hence setting the stage for a government that will inherit the North American Free Trade Agreement negotiations and tense relations with U.S. Should there be more headlines about the intentions of the new president, volatility might arise on MXN. However, Manuel Lopez, who once referred to President Trump as “erratic and arrogant”, has struck a conciliatory tone toward after his victory by thanking Trump for his congratulatory message and declaring his desire for friendship and mutual respect. Lopez had said, a day after his win, that he would be willing to work out a deal with Trump and Canada on NAFTA as Trump had previously threatened to withdraw from it if the three countries is not able to reach a fair deal. U.S. Secretary of State Mike Pompey is also expected to visit Mexico on Friday to meet with Lopez and discuss immigration, commerce, security and development. 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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