Trade wars, rate decision keep traders on edge
Swiss International Financial Brokerage Co
The US Dollar remained on the defensive for much of last week as markets continued to revel in the de-escalation of Eurozone political risk. Haven-seeking capital flows that launched the currency to an 11-month high as governments in Rome and Madrid appeared ready to implode reversed course after both managed to muddle through (at least for now).
A lifeline emerged amid trade war concerns, as expected. Investors turned defensive ahead of what promises to be a contentious G7 leaders’ summit in Quebec. The gathering will mark a showdown between US President Donald Trump and his counterparts after he opted to let lapse steel and aluminum tariff exemptions for the European Union and Canada.
The summit’s outcome will be revealed on Saturday, setting the tone for markets when the opening bell rings on Asia Pacific bourses Monday morning. Signs of a deepening rift and likely escalation of hostilities between the world’s top economies is likely to translate into another risk-off push, boosting the greenback. A lastminute breakthrough will probably have the opposite effect, though probably not for long.
Indeed, the defusing of trade tensions might be reframed in more supportive terms for the benchmark currency as the FOMC monetary policy announcement enters the spotlight. A rate hike is widely expected. That puts the accompanying statement, official forecast update and postmeeting press conference with Chair Jerome Powell into focus.
Projections for next year’s rate hike path ought to be particularly interesting. Indeed, central bank officials and market participants seem broadly aligned on the outlook for 2018, with one more hike due after this month’s increase. That shifts speculation forward, where the priced-in policy trajectory still trails FOMC members’ more optimistic view.
A broadly hawkish tone echoing increased confidence in reflation prospects that showed up in the statement following May’s FOMC conclave is likely to sound more plausible if trade war worries are diminished, clearing an important obstacle to further tightening. It may be somewhat tarnished if tensions persist, although the reach for liquidity in such a scenario may keep the US unit well-supported all the same.
The big item this week out of Japan was the final read of Q1 GDP, which had previously indicated an annualized contraction of -.4%. GDP growth for last quarter was revised down to an annualized -.6%, and this is perhaps even more worrisome than initially thought as this contraction ended two consecutive years of GDP growth for Japan. The primary drag appeared to emanate from domestic consumption, and this comes from a continued lag in wage growth. Capital investment continues to grow, albeit at a moderate pace, and hopes are high that economic growth will resume after the Q1 pullback. While a match of last year’s 1.7% GDP growth might be a bit too optimistic, the prospect of strength returning to US and EU markets could help the Japanese economy get back on an upward trajectory.
The Australian Dollar has just endured something of a volatile week. The good news, perhaps, is that it may not be set for a repeat in the next seven days. The bad news, for bulls at least, is that there are few reasons to expect much more strength.
The Aussie rose on stronger-thanexpected retail sales and corporate profits data last week. These raised the curtain for what turned out to be a blockbuster return to form for official Gross Domestic Product expansion in the first quarter. Its 1% rise knocked forecasts way out of the park.
However, GDP figures are always open to charges of tardiness- we are after all close to the end of the second quarter now. Sure enough, the currency was hit by more-recent data. April’s trade surplus wasn’t far from market hopes but export weakness fueled worries that the first quarter may just be as good as it gets for the Australian economy this year.
The currency was hit again by worries about the emerging markets, and by AUD/USD’s its inability to break above technical resistance around the 0.7672 level.
The coming week will probably seek market interest focused on Thursday in the Asia Pacific region. That’s when Australian employment numbers will see daylight. These are expected to come in quite strongly, but the Australian economy has been a job-creation machine for some time without much impact on inflation or, crucially, the Reserve Banks’ relaxed attitude to raising interest rates. Futures markets don’t expect any increase in the Official Cash Rate’s 1.50% record low until the end of 2019.
And the US Federal Reserve’s June monetary policy decision is also due Thursday Asia Pacific time. The central bank is widely expected to raise rates once more, and markets will of course be keen on any steer as to how much more often it may do so this year.
Whatever impression they get, another Fed rate rise will probably remind markets just how firmly interest-rate differentials are running against the Aussie Dollar, not just at the moment, but for the foreseeable future.
Gold prices inched higher this week with the precious metal up nearly 0.30% ahead of the New York close on Friday. The gains come amid continued strength in U.S. equity markets with the S&P 500 pressing higher for a third consecutive week. A newfound weakness in the US Dollar has continued to put a floor under gold prices with the DXY down nearly 0.7% this week.
It was a quiet week for economic data but things pick up next week with central bank rate decisions from the FOMC, the ECB (European Central Bank) and BoJ (Bank of Japan) on tap. The Federal Reserve is widely expected to hike the benchmark interest rate by 25 basis points and the focus will be on the updated economic projections as they pertain to growth, employment and inflation. For gold, a hawkish tone from the central bank could weigh on demand for nonyielding assets like gold. However, with growing concerns regarding a mounting global trade war, Fed Chair Jerome Powell & Co may leave the door open for a more gradual normalization process if the dot plot reaffirms expectations for just one more hike this year- such a scenario would likely be bullish for gold,
Further highlighting event risk next week will be the highly anticipated meeting between President Trump and North Korean Leader Kim Jong Un for the Nuclear Summit- an X factor for traders that could be a big driver of near-term risk sentiment (depending on how things go). For gold, these events have the potential to fuel a break of a multi-week range in price. Keep in mind that despite all the volatility seen in prices in 2018, bullion is down just 0.5% year-to-date and from technical standpoint, we’re looking for a breakout a near-term consolidation range to offer guidance.
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