Dollar gains as trade war fears ease and Brexit talks escalate

Trump signals readiness to participate in trade talks

KUWAIT: In a sign of the emerging softer rhetoric in international trade negotiations, President Trump indicated the possibility of the US re-joining the Trans-Pacific Partnership (TPP), a trade pact from which the US withdrew in early 2017. The US President and Japanese Prime Minister Shinzo Abe said on Wednesday they had agreed to intensify trade consultations between the two longtime allies, with an aim to expand investment and trade between their countries. “President Trump and I agreed to start talks for free, fair and reciprocal trade deals,” Abe said at a joint news conference with Trump.

Looking at the debt and equity markets, US treasury yields gained momentum last week as the prospect of trade wars eased in the market. The 10-year US treasury yield reached 2.96 percent, a 4 year high when it started the week 2.82 percent only. The earnings season in has weighed in on US equities as IT shares slipped reversing the gains of the Dow Jones index in the beginning of the week.

Globally, the tensions escalated between the EU and the UK as EU officials are set to reject a potential UK solution to the crucial issue of what happens to the Irish boarder after Brexit. Even though the UK hasn’t submitted a formal proposal, it has indicated that the bloc’s solution for maintaining an invisible boarder should apply to the whole of UK. Yet the European Commission is said to oppose it and only wants to offer that special status to Northern Ireland. The result is a mounting pressure on Prime Minister Theresa May to try and keep the UK in the EU’s customs union after Brexit.

On the currency front, the dollar index opened the week on a strong footing reaching 89.850 before retreating towards midweek following Trump’s remarks of the “currency devaluation game” that China and Russia are playing. However, soft economic data from the UK and EU along with the increasing tensions in Brexit talks pushed the dollar to a weekly gain of 1.00 percent and closing the week at 90.477.

The Euro started the week with a bearish move and reached a low of 1.2250. The single currency had a volatile week and reacted to weak inflation data, the complications of the Brexit talks and the reduced concerns of trade wars. The recent trend in inflation supports the case for a dovish ECB and possible extensions in the QE program. The currency closed the week at 1.2284.

The cable had the biggest loss amongst the major currencies with a 2 percent decrease in the exchange rate last week. The currency was mainly affected by weak retail sales, lower than expected wage growth and lower inflation. Yet, the increased uncertainty on the Brexit negotiations with the EU sent the Sterling Pound plunging by 100 points. The pair closed the week at 1.4001. The Japanese yen traded in a narrow range, but as global tensions eased the safe haven retreated against the US dollar and reached a high of 107.73. The pair closed the week at 107.63.

US retail sales accelerates Consumers have finally bounced back in March by buying more cars, furniture and appliances. Pushing US retail sales to grow 0.6 percent in March, up from a 0.1 percent drop in February and comfortably surpassing the 0.4 percent forecast by analysts. This was the first month of growth since November, ending a three month slide that had been the longest slump in three years. Analysts are attributing some of the increase in retail sales to the effect of the tax reforms in the country.

US housing market US new-home constructions rose by more than forecast in March backed by a rebound in multi-family starts. The figure came at 1.32 million annualized against an anticipated figure of 1.27 million, indicating a tighter job market and increasing confidence to purchase big-ticket items supporting construction. Factory output expanded at a 3.1 percent annualized rate in the first quarter following a 5.5 percent pace of the final three months of 2017, the strongest back-to-back period in six years. Manufacturing makes up 75 percent of total industrial production and accounts for about 12 percent of the economy.

UK economic data

Data showed average weekly earnings in three months to February were 2.8 percent higher than a year before. The rate is unchanged from a month before, and a two and a half year high, but below economists’ forecasts of an increase to 3 percent. Albeit a positive reading, being lower than the CPI reading of 2.9 percent, is raising questions about whether it justifies a rate hike form the Bank of England. Meanwhile, unemployment in the latest three month period unexpectedly fell to 4.2 percent, the lowest unemployment rate since the three months to May reading of 1975.

Inflation figure in Britain dropped from 2.7 percent to 2.5 percent for the month of March. The negative figure caused the cable to depreciated nearly 100 basis points versus the US dollar. The pull back in inflation may not prevent the central bank from increasing interest rates in May , yet the market dropped the probability of a hike from 88 percent to 55.7 percent.

Eurozone inflation Annual inflation rate was 1.3 percent in March and up from 1.1 percent in February, yet lower than the market’s expectation of 1.4 percent. This is the second month in a row where inflation has been revised down between the flash and the final release. Inflation in March was pushed up by the rise in services prices (services inflation went from 1.3 percent to 1.5 percent) due to Easter, which this year was earlier than in 2017. This affected transport services and package holidays in particular. Unprocessed food price inflation also reverted back into positive territory as the base effects from the bad weather at the beginning of last year that pushed up fruit and vegetable prices washed out.

China’s GDP

In China, economic expansion held up amid robust consumer spending, underpinning global growth and giving authorities room to purge excessive borrowing, while the industrial sector showed signs of modest slowdown. Industrial production rose by 6 percent lower than the forecasted 6.3 percent, while GDP grew by 6.8 percent in-line with the market’s expectations.

Japan’s inflation

The consumer price index (CPI) increased 1.1 percent year on year in March, slowing from 1.5 percent in February. The slowdown in headline inflation was largely due to the ongoing normalization in fresh food prices. Indeed, fresh food prices dropped 4.8 percent monthly in March, decelerating the over-year-ago comparison to 6.3 percent yearly from 12.4 percent in February and 12.6 percent in January. As such, the BOJ’s preferred measure of core inflation, excluding fresh food and energy products, remained stable at 0.5 percent yearly in March.

Kuwait

Kuwaiti dinar at 0.30015

The USDKWD opened at 0.30015 yesterday morning.