Dollar rally continues, rate hike in sight

NBK MONEY MARKETS REPORT

Last week the US dollar continued its rally against most of its counterparts sparked by Presidents-elect Donald Trump’s promises to introduce expansionary fiscal policies and boost growth. A Trump administration could spell tax cuts, infrastructure spending and amnesty for corporate dollars held overseas that will fuel inflation and bring extra capital into the United States. Furthermore, expectations of a US rate hike were fueled further by the release of the FOMC’s latest meeting minutes. “Some participants noted that recent committee communications were consistent with an increase in the target range for the federal funds rate in the near term or argued that to preserve credibility, such an increase should occur at the next meeting,” reported the minutes. While expectations are now at 90 percent for a hike, the question now remains as to whether these higher interest rate expectations have already largely been priced-in to the rallying US dollar, or whether the greenback has significantly further to run. Rising anticipation of a Fed rate hike coupled with expectations of higher bond yields as Trump prepares to take office could drive the dollar even higher in the near-term.

The US dollar index opened the week at 101.420 and continued its rally to a new 13 year high of 102.05 after FOMC minutes and positive economic data were released. The USD retreated slightly on Friday spurred on by investor profit taking. The index closed off the week at 101.49.

The euro remained subdued against the rallying US dollar throughout the week. Even the release of the strongest composite PMI of the year could not help resist the rallying USD. The fact is that the European economy is lagging behind a much more advanced US recovery and the market optimism about the future the US economy after under Trump have pushed EUR/USD to cycle lows. The EUR/USD opened the week at 1.0580 and closed off the week at 1.0584.

In the UK however, the British pound seems to be resilient and holding of against the US dollar. The GBP was actually able to rally 1.5 percent against the USD at the open of the week moving from 1.2319 to the week’s high of 1.2512. The rally comes on the back of hopes of a soft British exit from the EU after Prime Minister Theresa May said she was open to a transitional deal to avoid cliff edge Brexit. The GBP/USD closed off the week at 1.2474.

In Japan, USD/JPY has extended its rally to the highest level since March reaching 113.90 before stabilizing around 113 later in the session. Risk appetite has generally remained supportive with equities holding on to recent gains and US Treasury yields rising. The USD/JPY closed off the week at 113.06.

On the commodities front, focus is firmly fixated on next week’s OPEC meeting in Vienna. Renewed optimism comes from the latest comments made by oil ministers of Saudi Arabia and its allied Gulf states. The Saudi Arabian backed proposal to set a production ceiling of 32.5 million barrels a day would remove almost 2 percent of the world’s oil supply. Furthermore, OPEC could face a challenge next year as Donald Trump’s goal of boosting US energy output by easing regulations could threaten to increase the global oversupply of crude in 2017. In the Beginning of the week, Brent crude oil opened at $46.92 and reached a high of $49.5 before closing at $47.24.

The price of gold fell to the lowest level in ten months on Friday, reaching $1,171.21 an ounce. Having fallen in excess of 10 percent from a brief post-US presidential election high of $1,337, the precious metal remains under pressure ahead of an expected increase in interest rates in December and solid economic data from the US Gold opened the week at $1,207 and closed the week at $1184.38.

Existing Home Sales Rise

US home resales rose in October to their highest level in more than 9 years as homebuyers took advantage of still-low mortgage rates to snatch up properties. The report came on the heels of data last week showing a surge in housing starts. It also added to strong reports on retail sales and the labor market as well as improving manufacturing surveys suggesting that the economy continued to gain speed early in the fourth quarter. Sales increased to 5.60 million from 5.49 million in September.

New Home Sales Down

New-home sales slid in October but downward revisions to sales data from prior months continued to point to a market moving forward very slowly. Sales ran at a seasonally adjusted annual rate of 563,000, the Commerce Department said Wednesday, down 1.9 percent from the 574,000 pace set in September, which was revised down from 593,000. Compared to last year however, October sales were 17.8 percent higher and total sales so far in 2016 were 12.6 percent higher. The slowdown could be attributed to lean supply that’s keeping prices higher as home builders haven’t ramped up enough construction of new homes to levels that many analysts believe would nurture a healthier market. However, that may slowly change since the Commerce Department said last week that construction on new houses surged nearly 26 percent in October to the highest level in nine years.

More Core Durable Goods Orders

Orders for US business equipment climbed in October for the fourth straight month and sales also advanced as corporate investment began to increase. New orders for manufactured durable goods in October increased $11.0 billion or 4.8 percent to $239.4 billion. Excluding transportation, new orders increased 1.0 percent and excluding defense, new orders increased 5.2 percent. The jump in total bookings in October was the biggest in a year and included more orders for fabricated metals, machinery, computers and electrical equipment.

President Draghi testifies

European Central Bank President testified to the European Parliament Monday about the ECB’s Annual Report. Draghi stated that recovery continues to proceed at a moderate, but steady, pace and has shown remarkable resilience to adverse developments and uncertainties emanating from the global environment. “In fact, euro area unemployment has been steadily declining domestic demand has also strengthened and real GDP growth has recorded positive figures for 14 consecutive quarters,” he continued. Since the beginning of the year headline inflation has gradually picked up, moving from the negative rate of -0.2 percent in February to 0.5 percent in October. He later attributed the ECB’s QE program as the key factor behind these positive developments.

Eurozone PMI signals strong growth

Economic growth in the Eurozone accelerated at the fastest pace this year in November as rising order books prompted firms to take on extra staff improving employment and average prices inched higher as higher input costs were passed on to the consumer. The report indicated that inflationary pressures are at their highest for over five years. The manufacturing and services sector both expanded this month with the services sector seeing the best expansion for 11 months. The preliminary ‘flash’ Markit Eurozone Manufacturing PMI rose to 54.1, up from 53.3 in October while the Services PMI rose to 54.1 from 52.8.

German sentiment still optimistic

German business morale was unchanged in November a survey showed on Thursday, suggesting company executives are still optimistic about the growth prospects for Europe’s largest economy despite growing political uncertainties. The Munich-based Ifo economic institute said its business climate index, based on a monthly survey of some 7,000 firms, was unchanged at 110.4 in November after a slight downward revision reported in October. Ifo chief Clemens Fuest said “Confidence in the German economy continues to be good” in the current business situation and that the economy seems to be “unfazed by the election of Donald Trump as US president.”

UK public sector net borrowing decrease

In October 2016, the public sector spent more money than it received in taxes and other income. This meant it had to borrow £4.8 billion to balance the books. Public sector net borrowing (excluding public sector banks) decreased by £1.6 billion to £4.8 billion in October 2016, compared with October 2015. Of this £4.8 billion, £2.0 billion related to the cost of the “day-to-day” activities of the public sector (the current budget deficit), while £2.8 billion related to the spending on infrastructure (net investment). In the current financial year-to-date (April to October 2016), the public sector borrowed £48.6 billion. This was £5.6 billion lower than in the previous financial year-to-date (April to October 2015). Annual borrowing has generally been falling since the peak in the financial crisis in 2010.

UK autumn forecast statement

Newly appointed UK Chancellor of the Exchequer Phillip Hammond delivered the first budget plan since the UK voted to leave the European Union this week. In the Autumn Report, Hammond said the Office for Budget Responsibility, the government’s independent forecaster, thinks U.K. growth in 2016 will be higher than forecast at 2.1 percent. In 2017 however, it will slow to 1.4 percent on lower investment and consumer demand driven by uncertainty and higher inflation. Hammond also confirmed he is abandoning his predecessor’s flagship policy of returning to a budget surplus within this parliament. Instead, he will borrow to finance spending on the country’s productive capacity in a “National Productivity Investment Fund.” The £23 billion Fund will be spent on housing, research and development, and economic infrastructure including transport and fiber-optics.

Japanese prices rise

Japanese consumer prices rose in October for the first time in nine months, although core inflation continued to decline, painting a mixed picture of the economy at the start of the fourth quarter. The national consumer price index rose at an annualized 0.1 percent in October, following a 0.5 percent year-overyear drop the previous month, the Statistics Bureau reported Friday.

Kuwait Kuwaiti dinar at 0.30505 The USDKWD opened at 0.30505 yesterday morning.