Dol­lar rally con­tin­ues, rate hike in sight

NBK MONEY MAR­KETS RE­PORT

Kuwait Times - - BUSINESS -

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.

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