Most of top currencies not affected by US withdrawal
Rising oil prices lift currencies of some oil exporting countries
Last week, President Trump declared the United States’ unilateral withdrawal from the Joint Comprehensive Plan of Action (JCPOA). The JCPOA is an international nuclear agreement that served to control Iran’s nuclear program, signed in conjunction with China, France, Germany, Russia, and the UK and approved by the UN Security Council in 2015.
Moreover, Trump order that all US sanctions would be re-implemented and entities will have a grace period of 90 days or 180 days to cut their exposures to Iran. The most significant sanctions will be re-imposed after 180 days, encompassing oil sanctions that entail noteworthy reductions in the acquisition of Iranian crude.
Looking at the possibility of countries backing US sanctions, certain allies including Japan and South Korea may comply with the proposed sanctions on Iran due to the concern of losing US security on the North Korean issue. On the other hand, China, Turkey, Russia and India may be in conflict with the sanctions because of their interests of purchasing Iranian crude oil.
As for the currency market, most majors weren’t affected by the US withdrawal from the nuclear deal as they ended the weekly session where they had started off on Monday. It was a different story for appreciating currencies like the Canadian dollar, Norwegian krone and Russian rouble. Currencies of some oil exporting countries soared last week after oil prices spiked to a 4-year high and Brent crude oil reached $78 a barrel. The increase in oil prices could create losers and winners in the FX market depending on whether the nation is a net importer or exporter of oil.
Consumer prices in America edged up modestly last month pointing to a steady buildup in inflation. The CPI came in at 2.5%, the biggest gain in 14 months after rising 2.4% in March. The 3% jump in gasoline prices was the main factor for the increase in consumer inflation. However, the core data was muted as the annual rate remained unchanged at 2.1% on an annual basis. The big picture remains that core inflation has accelerated this year faster than Fed officials anticipated just a few months ago, which will keep the Fed on track to raise interest rates again in June.
The momentum of inflation on the producer level decelerated in April after recording robust readings in past three months. Industrial price growth inflated 2.6% annually last month, down from 3% seen in March. Excluding volatility caused from food and energy prices, core PPI rose 2.4% from a 2.7% recorded in the previous month. That puts a slight dent into what has, over recent weeks, been a growing sense of confidence in the market and among Federal Reserve policymakers on the US inflation outlook.
Despite the latest downward trend in price growth, the slightly weaker figure may be temporary as manufacturers have been reporting higher expenditures on raw materials. The FED’s preferred inflation indicator, the core PCE is currently at 1.9% and is expected to breach the 2% objective in the coming months. President Trump exited the Iran nuclear deal, therefore higher energy prices could kick-start a new round of inflation at the producer level. Overall, price growth has gained decent upward movement in the past several months from wages to consumer inflation and on the producer front. Therefore, it is clear that inflation is broad based. The slightly weak figure witnessed last month may not alter the FED’s gradual path of monetary tightening if the downward pressure on inflation doesn’t persist.
Europe & UK
The Bank of England voted 7-2 to retain its interest rate at 0.5%, while asset purchases was also maintained at GBP 435B with a unanimous vote. Governor Carney contradicted the Office for National Statistics’ assessment, stating that the feeble economic data in Q1 2018 was related to harsh weather conditions and assumes that the statistical office would soon reassess the weak 0.1% estimate of growth rate higher. On the negative side, the Bank decreased its inflation and growth forecasts for the quarters to come. The Q1 shock in growth seems to have been instrumental in cutting the GDP projection for this year to 1.4% from 1.8%. An expansion of 1.4% this year can put Britain at the very bottom of the developed nations. As for the inflation outlook, price growth is projected to fall back more quickly to hit the 2% target in two years. In details, Q2 2018 inflation was revised down to 2.4%, from 2.7%. For Q2 2019, the level was lowered to 2.1%, from 2.2%. Q2 2020 inflation expectations decelerated to 2.0%, from 2.1%. The reason for the diminished inflation outlook was due to a faster fading of the impact of Sterling’s depreciation on import prices.
On the interest rate sphere, money markets currently foresee three rate rises from the Bank over the next three years, with the first occurring late this year or in early 2019. Although, everywhere you look, the economic debate for tightening monetary policy is retreating. House prices are depreciating, retail sales are soft and the services sector is on pause because of Brexit uncertainties. The overall theme will be recorded as a dovish hold by the BoE, that means the Super Thursday norm was maintained and the pound fell for the 9th time out of the 12 Super Thursday we have had so far. The Sterling has now lost 5.5% of its value to the buck since mid-April. Weak Price Growth in Switzerland Swiss consumer inflation disappointed markets last month as the figure was halved to 0.2% m/m from 0.4%. That brings the annual rate to 0.8% year on year in April, below the expected 0.9%. Therefore, the latest figure on price growth supports the case that the central bank will maintain its loose monetary strategy until it achieves the price objective. The weak CPI data paved the way for the Dollar to gain nearly 0.5% ground over the CHF to 1.0045. The Swiss franc is extremely sensitive to interest rate differentials as the economy still persists in a negative interest rate environment.
China’s latest inflationary report was mixed as consumer prices descended, while producer price growth rose for the first time in 7 months. The annual CPI fell from 2.1% to 1.8% in April, mainly due to food prices slowing down sharply. Therefore, this confirms the assessment that the spike in February was only one-off and was largely the result of the New Year Effect. The core CPI indicator that excludes volatile of food and energy prices rose 2.0% y/y, unchanged from March.
On the producer front, annual inflation accelerated to 3.4% compared to 3.1% in the preceding month. The rise in PPI is largely attributed to higher commodity prices. Looking at the breakdown, prices increased faster in the following industries: petroleum and natural gas extraction (15.2% y/y in April vs 6.9 y/y in March), chemical material and product (6.2% y/y vs 5.2% y/y), and petroleum refining (10.2% y/y vs 8.5% y/y).
In spite of a stronger than forecasted Q1 GDP data, economists polled by Reuters still expect China’s economic growth to cool to 6.5% this year from 6.9% recorded in 2017. The CPI index is well below the government’s 3% objective and the threat of a trade war with the US enhances the risks facing the world’s second largest economy in coming months. Therefore, it is likely that the central bank will maintain its current monetary policy with little signs of overheating in the economy.
The BoJ’s meeting minutes of March 8-9 didn’t reveal any new clues on Japan’s monetary path as the dovish theme on inflation persisted. Governor Kuroda indicated the central bank’s readiness to ramp up stimulus if the economy loses steam, in a push against assumption it could cut down monetary support earlier than expected. Given that price advancement expectations are still well below the 2% objective and policy has been steady since 2014, the BoJ has little reason to think about raising rates. Market hunger for a change in BoJ policy is unlikely to be satisfied and the Banks view is only likely to change if inflation expectations pick up.
Kuwaiti Dinar at 0.30145 The USDKWD opened at 0.30145 on Sunday.