Analysis written BY retail traders FOR retail traders
The Trump effect continues…
A fairly quick week 46 wrap this week as there really was only one story in town, and that is the continued strength of the USD. There are 2 primary reasons behind this, the 1st is the continuing impact of the surprise election win of Donald Trump. The USD has been significantly buoyed by the prospect of fiscal stimulus and infrastructure spending which is bullish USD. Much like China has done so over many years, infrastructure spending significantly benefits the local populace by giving them more money and boosting the economy. Essentially it is a different method of QE. This means that we could see inflationary pressures rising in the US in the very near future. That brings us on to the 2nd reason for USD strength, the 96% chance of an interest rate hike in December. There was concern about whether Trump winning could cast doubt on this, but Janet Yellen testified in the week that conditions were still favourable for tightening, and even went as far to say that failure to do so could present bigger risks.
With the US being the only country globally looking at tightening monetary policy we are likely to continue to see US dollar strength for some time to come. There were 600 pip moves in the USDJPY and EURUSD this week, and while perhaps not as dramatic as that considering its holiday season in the US, we should still prepare for further strength.
Data releases did nothing to dampen the chances of an interest rate rise last week with core retail sales and retail sales both coming in at 0.8% and previous readings also being revised upwards. There was some negativity on the week with PPI and CPI releases being relatively soft but that is unlikely to have any material effect.
There wasn’t a lot of data releases last week for the battered single currency but it’s fair to say that it took a severe beating by the strength of the USD. Losing over 600 pips in a week saw the Euro break a significant trendline to the downside and approach the 1.05 level, which, if it breaks, is a significant structural level. The only 2 notable releases was German GDP coming in slightly softer than anticipated at 0.2% and Eurozone final CPI coming in ahead at 0.5%.
The big issue for the Euro at the moment is less about data releases and more about political turmoil. With an Italian referendum on political reforms happening in early December, and the threat of the Italian president resigning if he loses it, this could make way for a challenge from the MS5 party. They are neither left nor right but they are considered a protest party, and they have already promised an EU referendum. Coupled with the Italian banking crisis Italy is a hotbed of volatility for the euro at the moment. We also have French elections in the very near future where the ever growing popular national front have promised an EU referendum, that means the Eurozone’s 2nd and 3rd largest economies could be onsidering their future in the single currency.
With USD strength and continued political angst could we see the Euro and USD reach parity?
Another surprisingly good week for the GBP with significant upside data releases starting with PPI on Tuesday coming in at 4.6% against an expected 1.6%, even if CPI slightly disappointed. The good news continued throughout the week with unemployment hitting its lowest level since 2005 and retail sales smashing the forecasted 0.5% coming in at 1.9%. While continued positive releases support the GBP we cannot forget that the longer term outlook could still be bearish considering Brexit. Since the recent High Court ruling investors have been less concerned about this but with the Supreme Court due to rule early in the New Year this may once again keep sterling under selling pressure but at least for the short term could remain range bound.
Some good news came as a welcome change for the Japanese yen last week with GDP coming in at 0.5% against a forecasted 0.2%. The Japanese economy has lacked strong growth for a number of years with slowdowns in exports and manufacturing. Earlier this month we also saw Japanese manufacturing expanded in October, and while the currency remains weak, these are certainly positive signs.
Minimal news for the Canadian dollar last week with the most notable being the consumer price index which rose by 0.2% in October, albeit slightly less than forecast. The currency was supported somewhat by oil prices increasing, closing the week above $45 a barrel. The Bank of Canada continues to remain concerned over underlying growth trends and inflation which is still below the 2.0% target.
AUD & NZD
Not much news on the calendar last week although both commodity currencies came under selling pressure, the Australian dollar significantly. Commodity prices have dropped recently, and in particular mining commodities such as iron, copper and gold, the latter largely due to USD strength. Australia is a mining country and therefore any fall in prices inevitably hurts the economy. Despite both currencies often benefiting in risk on environments, with yields increasing in USD 10 year bonds this is having a significant effect on inflow to the Antipodean currencies, so we possibly can expect these to remain under pressure for some time to come.
Source: Clifton FX thanks Andi Thornton for his original content.
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