Syria jitters replace trade war tensions

Dollar manages to stem early losses; euro gains

IBy National Bank of Kuwait

United States

t was an extremely light week in terms of economic data as global political turmoil continued to mount. Therefore, markets direction was mostly dominated by the possibility of a clash between Western powers and Russia in Syria. Meanwhile, trade war tensions have eased recently after both the US and China made positive gestures. China’s president promised to lower taxes on imports and open the country’s markets further. On the US side, president Trump suggested negotiations with China will lead to positive results while repeating optimism over NAFTA. The most important proposal of rejoining the TPP was the biggest surprise and indicates a possible shift in strategy. Anxieties around military action in Syria seem to be overshadowing any relief about a reduction in trade tensions between China and the United States.

For the meantime, safe haven currencies (JPY and CHF) are dwindling in conjunction with the cautious improvement in global investors risk sentiment. Heightened concerns over a global trade war have eased. At the same time, intensifying geopolitical risks involving the ongoing developments in Syria are having minimal negative spillover on global risk sentiment. The technical picture has become more positive for risk assets in the nearterm as the price of US equities have found support from their 200-day moving average and their encouraging performance last week.

Looking at the kick-off to the earnings season may bring equity markets back to fundamentals after recent global political turmoil have been important drivers for equities. Anticipation towards earnings is unusually high heading into this reporting period, suggesting greater risk of disappointment. Given the equity market’s correction in early February, a further sell-off in the coming weeks on disappointing earnings results would likely influence the FX market.

As for the FED’s meeting minutes, there was strong evidence that the committee is more confident in achieving its 2% price growth. Several monetary policy setters concluded that the appropriate path for the federal funds rate over the next few years would likely be slightly steeper than they had previously thought. The outlook of a sharper path of tightening may mean a movement from three hikes this year to four and more in 2019 or 2020 but the rates market is currently in no mood to price those risks given current uncertainties.

On the currency front, the US dollar was on the back foot at the start of the week following the latest release of the weaker than expected nonfarm payrolls report. Improvement in investors’ risk sentiment also played a role after Chinese President Xi Jinping promised to open the country’s economy further and lower import tariffs. On Wednesday, the negative momentum persisted in the Dollar over possible US military involvement in Syria. The Dollar’s negative trajectory was altered at the end of the week and snapped a four-day losing streak as worries about the threat of a clash between Western powers and Russia in Syria faded. Moreover, the FOMC’s minutes provided further conviction for a June rate hike. Overall, the Dollar index still managed to depreciate by 0.40% throughout last week.

As for the single currency, the euro didn’t hesitate to take advantage of the Dollar’s weakness at the beginning of the weekly session. The common currency also found further support from ECB’s president when he stated that the slide in stock markets this year had not materially had an impact on euro zone’s financial conditions, suggesting policymakers remain calm about the recent market volatility. ECB policymaker Ewald Nowotny also had positive remarks after calling on the ECB to get on with tightening monetary policy gradually and to start with the deposit rate. However, the euro weakened at the end of the week due to a somewhat dovish ECB meeting account and a stronger US dollar. The easing concerns over an imminent escalation of conflict between the US and Russia took one of the support features from the euro, it’s safe haven status of possessing a very large current account surplus. The euro gained 0.52% versus the green back in last week’s trading session.

The Sterling pound retained its positive tone last week and was the best performer among G10 currencies. The pound soared to the highest level since late January versus the US dollar and is near a one year high against the euro. Improving political prospects, a slight rebound in economic indicators and a robust Halifax House Price Index were all factors supporting the upward movement. Policy makers at the BOE have recently cautioned markets for higher interest rates to come and markets now expect the MPC to vote for another increase in May’s meeting. Rising interest rates tend to support currencies as foreign capital flows are drawn to countries where returns are rising and this can especially be seen in EUR/GBP movements. The pounded added 144 basis points on the Dollar last week.

The safe haven yen was in a consolidating mode until Thursday as markets continued to shift between risk-on and risk-off themes. The yen began its downward momentum on mid Thursday as war tensions were diminishing after President Trump softened his tone. Furthermore, hawkish FED meeting minutes revealed rates may rise even more this year and the yen is extremely sensitive to other countries monetary policies. The reason for that is the perception that the BoJ will be among the last major economies to tighten its monetary policy. The Japanese yen lost 0.38% of its value to the US dollar in the last five trading sessions.

In the commodities complex, the precious yellow metal may continue its upward momentum this year after strong gains in 2017. The most important driver is the demand for gold in times of risk and volatility. Higher equity market volatility will also provide a support to gold prices as we have seen earlier this year. Tighter monetary policies globally may create headwinds to rallies but are largely priced in. Last week, the safe haven asset gained 0.87% over the US dollar as global political tensions slightly overshadowed US economic fundamentals.

The meeting minutes of the FOMC revealed that officials down played the sluggish Q1 growth readings and expressed increased confidence in the US economy.

A majority of the policy setters agreed that additional rate hikes are warranted this year because labor market conditions are expected to improve even more and core inflation is anticipated to move up to the FOMC’s 2% target in the medium term.

For the current year policy makers are on the same page, however disagreement exists in what the appropriate monetary policy path should be for 2019 and 2020. The differences were already revealed in the dot plot released after the last meeting as the projections for 2019 and 2020 widened out. For next year,

Currencies

EUR GBP JPY CHF

Previous Week Levels

Open

1.2274 1.4091 106.89 0.9592

Low

1.2395 1.4296 107.77 0.9646

High

1.2286 1.4075 106.60 0.9533

the median projection for the federal funds rate is 2.9%. Five of the Committee’s current 15 members actually think that will be the appropriate rate, four members of the Committee think the rate should be lower, and six think it should be higher. Overall, the meeting minutes indicate that the appropriate path for the federal funds rate over the next few years would likely be slightly steeper than they had formerly projected. However, the direction of policy after this year is still up for debate.

Prices in the US were inflated last month after the CPI rose from 2.2% to 2.4%, while the core CPI followed the same momentum from 1.8% to 2.1%. The figures suggest that inflation soared at the quickest pace in a year. The enhancement was mainly due to a change in the method of calculating inflation. Weaker mobile phone charges, which had reduced price growth for the past year, were dropped out of the calculation. Therefore, the FED’s earlier prediction was correct that costs on mobile services were a large factor of subdued inflation. The latest indicators will add further evidence that price pressures are broad based and on the rise.

On the producer front, price growth last month came above expectations for both headline and core. The annual rate of PPI was inflated to 3% from 2.9% as the monthly rate rose by 0.3%. The core figure increased 0.4% m/m, which brings the year on year rate to 2.9%. That was the biggest increase since August 2014 for the core data. The wide-ranging increase in wholesale prices backs the view that inflation is on the pick up this year. Many economists believe that a tightening labor market, feeble

1.2334 1.4235 107.33 0.9622 1.2180 1.4075 105.95 0.9495 1.2465 1.4350 108.15 0.9740 1.2420 1.4303 106.70 0.9550

dollar and a fiscal boost will push price growth toward the Federal Reserve’s 2% target this year.

Europe & UK

ECB policy makers’ gathering last month raised concern about trade protectionism and rejected a push to declare the conditions are almost in place to end their bond-buying program. The Governing Council meeting disclosed that policy makers were close to meeting the objective of putting inflation on a sustained path toward the medium-term goal of just under 2%. However, officials concluded there wasn’t adequate evidence to make the call, with some arguing the slack in the economy may be larger than assumed. The second concern was the euro’s strength in recent months, partly due to fears over US protectionism. The movement in EUR/USD has not significantly reduced demand, but policymakers called the exchange rate a “significant source” of uncertainty with some predicting a more negative impact on inflation.

Overall, the most influential group on the council, including ECB president Mario Draghi and his chief economist Peter Praet, believe a degree of breathing room still exists. On the other hand, policymakers argued that the extra capacity is largely exhausted in the euro-zone and it is only a matter of time before inflation picks up. So, the ECB can afford to tighten its monetary policy and give price growth time to accelerate. Recently, Governing Council member Ewald Nowotny called on the ECB to get on with the process to ensure it can take a gradual approach and to start with the deposit rate, which has been in negative territory since mid-2014. The ECB has forecasted that core inflation will be very close to 2% in 2020. It seems the ECB is attempting a complex maneuver to get hawkish without causing a sharp appreciation in the single currency.

UK’s Manufacturing Sector Contracts

Britain’s defiance in the manufacturing industry came to a halt in February after the sector constricted for the first time in nearly a year. The manufacturing industry contracted 0.2% versus an expectation of a 0.2% rise. Last year, the sector was boosted by a mixture of a fragile pound and stronger global growth, however the modest stimulus from sterling’s 2016 depreciation has begun to fade. Recently, global economic indicators in the manufacturing sector are losing pace, especially in Europe. Looking at the survey, 54% of the manufacturing sector experienced an output decline, with machinery and equipment dropping 3.9%. In the latest three months, factory output rose 0.6%, the least since July. GDP expansion might be weaker in the Q1 than the 0.3% predicted by the Bank of England, which casts doubt on whether a May interest-rate increase is as likely as market pricing suggests.

Asia

Looking at Chinese price growth, both CPI and PPI inflation came in below accord at 2.1% y/y and 3.1% y/y respectively. Stabilizing food prices after the Chinese New Year holidays and slower commodity price gains were the main factors for muted inflation. The data confirms the view that February’s CPI inflation spike was one-off. As for the PPI, factory price has been descending consecutively for the fifth month and is currently at 17 months low. The recurring downward momentum in price growth increases the probability of an economic slowdown, which many economists have been stating. Inflation may ease even further as a slowdown in credit growth is feeding through to an overall softening in economic activity. On the monetary front, softer inflation readings and moderation in global growth at the start of the year are consistent with a neutral monetary policy outlook.

As always, BoJ Governor Kuroda reiterated his determination to maintain the central bank’s loose monetary program, while offering an optimistic view on prospects for meeting the 2% inflation target. Japan’s economy grew an annualized 1.6% in Q4 2017, marking the eighth straight quarter of growth. Although, core consumer inflation stood at 1% in February, well below the BOJ’s 2% target. A senior BOJ official stated there were promising signs in the economy that would help the central bank meet its price goal. The reason for the increased confidence on the price objective was due to a raised assessment for two of Japan’s nine regions and preserved its positive view for six areas as a tightening job market drove up household income and consumption.

Kuwait

Kuwaiti Dinar at 0.29970 The USDKWD opened at 0.29970 on Thursday morning.