Tag: Central Bank Watch

Fed Minutes to Drive Market as Trade Concerns Recede

The US dollar is mixed ahead of the release of the minutes from May’s Federal Open Market Committee (FOMC) meeting. The central bank held rates unchanged but there is almost 100 probability of a 25 basis points rate hike at end of the June 13 meeting. Commodity currencies were higher at the beginning the North American trade session only to fall as commodity prices gave way. Safe haven currencies rose after US President Trump said the June 12 Peace summit between North and South Korea could be delayed.

  • US Crude oil inventories expected to drop by 2.5 million barrels
  • UK inflation to remain steady at 2.5 percent
  • US 10 year bond yields were flat ahead of FOMC minutes

EUR Still on Backfoot due to Italian Politics

The EUR/USD lost 0.07 percent on Tuesday. The single currency is trading at 1.1783 ahead of the release of the notes from the Fed’s monetary policy meeting. The EUR is still struggling with the fallout of the Italian coalition. The latest from the union between the 5 Star Movement and the League is the nomination of Giuseppe Conte as prime minister. The lack of experience from the lawyer and academic did not inspire much confidence with the markets.



With rise of euro scepticism in the area the last thing needed was criticism from German economists who do not agree that the deeper integration proposed by French President Emmanuel Macron. 154 German economists criticized the call to protect the currency union and instead bring back the argument that economic reform is needed with member states who are struggling. Also opening the door to creating an orderly process for nations to exit the Union.

The economic calendar this week will not any major releases with mostly lagging indicators in the agenda. European producer managers index (PMIs) and the minutes fro the European Central Bank (ECB) meeting could offer some insight but investors are looking forward to more guidance from the central bank which so far has remained very quiet on what are its plans after the massive quantitive easing program runs its course in September.

Loonie Gets Commodities and Trade Boost

The USD/CAD appreciated 0.26 percent in the last 24 hours. The currency pair is trading at 1.2819 as the loonie bounced back during the Asian trading session from disappointing retail sales data on Friday and a long weekend after the Victoria Day holiday. Commodity prices rose as the USD rally ended after trade tensions eased with China. Strong commodities in particular oil prices boosted the CAD as well a strong signal the US is more open to trade negotiations as the fate of NAFTA remains to be decided. Energy prices could not maintain the upward momentum and West Texas Intermediate fell below $72 but geopolitics is keeping energy prices at 3 year highs.


usdcad Canadian dollar graph, May 22, 2018

The economic calendar this week will be dominated by the release of the Fed minutes. The market is pricing in a June rate hike and investors will scan the notes from the Federal Open Market Committee (FOMC) looking for further clues on the path of monetary policy. Fed members have supported two or more rate hikes this year. The Bank of Canada (BoC) is expected to hold its rate untouched in May at 1.25 percent after a string of soft data is not putting as much pressure as earlier in the year.

Core retail sales dropped by 0.2 percent instead of the 0.5 percent expected growth. Tuesday’s release of wholesales sales beat the forecast with a 1.1 percent gain and an upward revision to the previous 0.8 percent loss that now stands at –0.4 percent.

Oil Reaches 3 Year High on Supply Concerns

West Texas Intermediate is trading at $71.98 and trading near 3 year highs due to geopolitical events. The fundamentals of the energy markets call for a lower valuation as demand has not grown to levels that justify current prices. The Organization of the Petroleum Exporting Countries (OPEC) agreement with other major producers, most notably Russia, accomplish the goal of stability but it is now the uncertainty in the Middle East that drives price action.


West Texas Intermediate graph

Investors are aware of a risk that a rapid decline could come, but it could be achieved only if there is political stability in the region, a long shot at this point. Or if there are significant changes in how big oil producers not part of the deal react to higher prices. The US has slowly ramped up their production but with fundamentals only in the periphery at this time it could be some time before the market prices in higher oil production.

The situation in Venezuela and Iran could end up keeping prices at 3 year highs as supply disruptions have been the most effective factor dictating crude prices. Timing wise the start of the driving season in North America will be supportive as season demand rises.
Market events to watch this week:

Wednesday, May 23
4:00am AUD RBA Gov Lowe Speaks
4:30am GBP CPI y/y
10:30am USD Crude Oil Inventories
2:00pm USD FOMC Meeting Minutes
Thursday, May 24
4:30am GBP Retail Sales m/m
7:30am EUR ECB Monetary Policy Meeting Accounts
Friday, May 25
4:30am GBP Second Estimate GDP q/q
8:30am USD Core Durable Goods Orders m/m

*All times EDT
For a complete list of scheduled events in the forex market visit the MarketPulse Economic Calendar

US Futures Higher on Easing Trade War Fears

Reduced Chinese Tariffs Further List Sentiment in Markets

US futures are pointing to another higher open on Tuesday, building on Monday’s strong gains and benefiting from an apparent easing in trade tensions between the world’s two largest economies.

The postponement of new tariffs by both the US and China and the revelation that the latter will cut import tariffs on cars from as much as 25% to 15% and on car parts to 6% is seen as an important step away from a trade war that could have negative implications globally. Trade protectionism was one of the fears of a Trump Presidency and his announcement of tariffs and his approach to trade agreements went some way to justifying such views but this could be an important breakthrough.

Fed Minutes Will Provide Further Insight on Interest Rates on Wednesday

With sentiment gradually improving and risks subsiding, we could see stock markets edge their way back towards the levels we were seeing earlier this year, although we are still around 5% below those levels. It’s also worth noting the role that rising US yields could play with some citing the anticipated pick-up in yields as contributing to the less bullish environment.

Dow (US30) Daily Chart

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The recent comments from the Federal Reserve suggest they’re in no rush to raise rate forecasts despite the uptick in some of the data, particularly inflation. If the central bank is willing to accept above target inflation for a time, as long as it doesn’t rise too much, it could ease investor concerns. We should find out more about policy makers views on this in the FOMC minutes which will be released on Wednesday.

DAX Unchanged, German PMIs Ahead

GBP Pares Gains as BoE Offers Little New Direction on Interest Rates

The Bank of England inflation report hearing today had the potential to be a very interesting event given the decision by the Monetary Policy Committee earlier this month not to raise interest rates, despite spending months laying the groundwork for such a move. Policy makers have come under fire on numerous occasions in recent years for failing to provide accurate and reliable forecasts both on the economy and for interest rates and the latest move will not help this reputation.

The hearing itself was quite tame compared to what it has been in the past and I’m not sure there was anything noteworthy to take away from it. Governor Mark Carney was keen to stress that the outlook of a few hikes over the next few years hasn’t changed and that the timing of the first is not overly important. There was also clear opposition to the suggestion of providing more precise interest rate forecasts each quarter which given the difficulty with them already seems sensible.

GBPUSD Daily Chart


While the pound pared earlier gains during the hearing, it’s clear that traders took little away from the event itself and will instead be more focused on how the data develops in the months ahead. With the markets now only pricing in a rate hike later this year, the central bank and the economy has plenty to do to convince traders that could come earlier in August if it’s planning to get the ball rolling earlier. Given the stage that Brexit negotiations are at, it may be worth waiting until the end of the year as policy makers will have a much clearer understanding of the outlook for the economy.

Trade Ceasefire Supports Risk Assets

Economic Calendar

For a look at all of today’s economic events, check out our economic calendar.

US and Oil Data Eyed as Italy Nears Populist Rule

US Data in Focus After Encouraging Retail Sales Figures

US futures are flat ahead of the open on Wall Street on Wednesday, as we await a number of data points from the world’s largest economy and Italy closes in on a eurosceptic coalition government.

We got some interesting retail sales figures from the US on Tuesday which helped lift yields and saw a fourth rate hike this year being around 50% priced in. There’s plenty more data to come today which may further lift expectations including housing starts, building permits, capacity utilization and industrial production. The dollar is making gains again early in the session having pared gains late last week and has already set a new high for the year so far, ahead of the figures.

Oil Inventories Could Trigger Some Profit Taking

We’ll also get EIA crude inventories figures today, which comes shortly after OPEC published figures showing inventories in OECD countries had fallen to nine million barrels above the five year average from 340 million at the start of last year. Clearly the production cuts have been working but with the deal rolling on and Iranian sanctions potentially restricting them further, oil prices could rise further before they stabilise.

A drawdown of around three quarters of a million barrels is expected to be reported today although API reported their figures on Tuesday and they indicated that stockpiles actually rose by 4.854 million barrels. A similar reading from EIA today could relieve some of the upward pressure on prices and trigger some near-term profit taking.

Italian Politics Pounds Euro

Italian Yields Spike and FTSE MIB Slips as Draft Program is Leaked

In Europe, much of the focus has been on Italy where a leaked draft of the joint program of Five Star Movement and League has unsettled investors, leading to 1.5% losses in the FTSE MIB stock index and a spike in Italian yields with the 10-year rising back above 2%. Markets haven’t necessarily been complacent about the prospect of a eurosceptic coalition until now but investors have taken the developments very much in their stride and not got carried away.

Italy 10-Year Yield Daily Chart

Source – Thomson Reuters Eikon

The draft program though has fuelled investors’ fears about what a coalition of the two parties – both of which have openly opposed membership of the currency union in the past and most likely still do despite it not being a key feature of the election campaign – will mean for the country. The most concerning component was the desire to create economic and judicial procedures that allow member states to leave the monetary union, which makes clear their ultimate intentions.

While both parties have since claimed the draft was an old version and they had since decided against calling into question the single currency, it’s impossible to ignore and even if an exit isn’t pursued in the immediate future, it looks a case of when rather than if they do so, if the coalition is formed. There were other aspects of the draft that will also concern investors, not to mention the joint desire to no longer be constrained by the currency blocks fiscal rules.

It seems euro leaders were too quick to congratulate themselves on a job well done when defeating populists last year and may have a massive job on their hands that makes Brexit look more straight forward. I also wonder how much this could affect the European Union’s approach to Brexit as other leaders will be wary about giving the populists more reason to push for an exit of their own, citing the deal the UK got as an example of what can be achieved.

I’m a Believer

Economic Calendar

For a look at all of today’s economic events, check out our economic calendar.

I’m a believer

I’m a believer

The promising US Retail sales data left a resound footprint on global markets as US consumers are loosening their purse strings, but perhaps more important from an investor perspective, the data speaks directly and plainly while providing a linear gauge of the trickle-down effects from fiscal stimulus. Indeed, green shoots start to emerge.

The UST 10Y closed above the critical and pivotal 3.05 % area which encouraged the dollar Bulls to hammer the EURUSD down to critical structural support levels. While the clearest dollar bull signal is from US 10y yields, but with trader humming the iconically cool ” I’m a Believer” this morning, there’s permanence building as waves of fresh dollar longs hit the books.

Oil Markets
Despite OPEC oil demand forecasts amidst China’s unquenching thirst for crude oil rising, bullish Asia sentiment seems to have gone off the boil after China reported weaker-than-expected investment and retail sales in April, muddying its economic outlook suggesting the domestic surge in refinery runs could be short-lived.

The stronger dollar typically causes a bit of indecision as investors usually back off from commodity risk when the US dollar strengthens.

The API reported a surprise inventory build for the week ending May 11 which caused some intraday long positions to cut risk.

But at the end of the day, Oil markets remain supported by the usual suspects, Iran and Venezuela and OPEC compliance suggesting Oil remains a buy on the dip.

Gold Markets

Gold finally succumbed to the $1300 level as the stronger USD dollar ran roughshod through COMEX gold overnight. But with Gold positioning on CFTC significantly reduced against much of the year, mirroring the money flows into the USD over the past month, there wasn’t a lot of market stress on the move from a flow perspective.

Shifting interest rate dynamics on the back of oil-driven inflation expectations with the stronger USD in tow suggests we could see an extension lower. But ultimately the longer term inflationary pressures, especially with real interest rates expected to stay historically low, gold should continue to find support. However.,logic suggests letting et the dust settle, as bullish signals have remained far and few between of late.
G-10 Currencies

EUR: The US retail sales number triggered a massive currency reaction on the back of UST 10 Y yields rocketing higher. While the market is tentatively finding support at the critical 1.1820-25 level, it’s hard to argue the current direction given the surging US yields which suggest we could print in the 1.17 handle sooner than later.

JPY: USDJPY soared as the US Treasury yield rally spotlight on the interest rate policy divergence between the Bank of Japan and the Fed. USDJPY rose from 109.91 at the NY open to 110.44. However, Yonhap reported North Korea is cancelling its meeting with South Korea for Wednesday and threatening to withdraw from its summit with Trump – all because of US-South Korea drills. Which has seemingly capped, at least for the time being, USDJPY upward momentum

Malaysia

The local markets are going through a period of inflexion. After navigating a potentially high-risk election, as investors are taking a well-deserved breather after coming out relatively unscathed.

But with the US dollar trading stronger across the EM Asia Basket and in G-10 space the Ringgit will struggle to make any inroads today Especially with the US 10 years UST surging to 3.08 overnight.

Investors are unlikely to flock back into the Ringgit end masse over the next week especially with the USD surging and US yields punching higher and oil prices off their latest high-water mark.

We should expect a bit of a bumpy ride over the next few weeks as soon as the government lays all their policy cards on the table. Yesterday Malaysia’s new Council of Eminent Persons briefed the public on its activities, but the main take away is that fiscal reforms will shade more towards cost cuts to offset GST removal at this stage and should be good enough to keep the prey Credit agencies eyes at bay for the time being.

Stephen Innes OANDA Head of Trading AOAC

US Futures Pare Gains Ahead of Retail Sales Data

US Equities Looking Less Vulnerable After Recent Breakouts

US equity markets have been on a good run of late but are poised to open slightly lower on Tuesday, paring the steady gains achieved over the last couple of weeks.

This comes after the Dow and S&P 500 both surpassed the previous peak which came almost a month earlier in what could be a symbolic indication that the worst of this particular correction is now behind us. From a technical standpoint, the failure to make a new low a couple of weeks ago before now making a new high is encouraging as a signals the end of a downtrend.

Retail Sales Expected to Rebound After Tough Winter

There’s a number of data releases that will grab traders’ attention today and could determine whether we see an early rebound in stock markets. The most notable of these is the retail sales data for April, which is expected to be relatively good for a second consecutive months following a few poor numbers that were a little worrying. Core retail sales are also expected to be good, rising by 0.5% compared to March.

Rate Differentials and Trade Fears Handcuff Capital Markets

UK Jobs Data in Line as Wages Rise Most Since 2015

The UK labour market figures offered little support to the struggling pound this morning, which continued to hover around four month lows against the dollar and look vulnerable to further declines. While unemployment remains at the lowest since 1975 and employment at the highest since records began, the numbers were all pretty much in line with expectations and was therefore priced in.

GBPUSD Daily Chart

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The potential for upside would have likely come from the earnings data but even this was in line, although excluding bonuses, they did rise to 2.9% which is the highest since August 2015. Still, with inflation still high, real wages were unchanged once bonuses were taken into consideration which is likely to continue to weigh on the economy and confuse matters for the Bank of England, which is being heavily criticised after not raising rates last week.

China Data Flash

Clearly traders don’t view the increase in wages as increasing the chances of a rate hike from current expectations. It could well be that traders view the recent wage data as being a temporary response to last year’s increase in the cost of living due to higher inflation as opposed to something more sustainable or that the recent improvement is being flattered by the year on year comparison after a dip 12 months ago.

Economic Calendar

For a look at all of today’s economic events, check out our economic calendar.

A crowded tale of the tape

A crowded tale of the tape

Global equity markets revelled in their most favourable showing since early March after clement CPI  figures led to hopes of a Goldilocks economy in the US. But as senescent as this view is becoming, with the Federal Reserve Board looking to remove emergency accommodation, it’s perhaps not the best narrative to hang one’s long-term investor cap.

The combination of a lower than anticipated inflation print and a less crowded long EURUSD positioning, saw the USD  backpedal into weeks end. However, interest rate differential still favours the USD, suggesting the recent dollar wave of appreciation while bruised, is not broken. Implying it’s far too early in the cycle for the USD to resume its more protracted downtrend. None the less, on the benign inflation print, traders might turn short-term agnostic on the USD ahead of the vital Retail Sales data, acknowledging we could be in for a period of consolidation.

However, before bringing out the ” Snooze Pillow”, there will be some conversations to engage in the global growth narrative as dealers pivot to US Retail Sales data. Also, FX markets will focus on  Fed speakers taking to the airwaves. Fed members perspective always increases in importance after any critical inflation metric. In this case, traders will be keen to hear their opinions on the tepid CPI print as US inflation remains  MIA.   The significant Fed event will be Tuesday’s Senate confirmation hearings of Richard Clarida and Michelle Bowman to join the Board of Governors as vice-chair and the community banker Governor seat respectively

Given that risk appetite along with movements in the USD is very much echoing the underlying developments in US yields. The US Retail Sales data and Fed speakers should provide reasonable signposts for global capital markets as the trading activity should remain intrinsically tethered to the trajectory  US interest rate policy and 10 Year UST yields over the near term.

AS well, look for oil prices will continue to have their far-reaching implication in inflation and US yields

On geopolitical font, US-China trade negotiations are expected to recommence this week with a potential visit from China Vice Premier Liu He. But the diffusing tension was the President took to Twitter overnight announcing he has instructed the Commerce Department to reverse its sanctions on China’s ZTE, which should be interpreted as a significant concession in the trade negotiations. However, a scheduled hearing on Section  301 of the trade act could keep the mood edgy.

Finally, the Middle East powder keg will remain a key focus with displays of aggressive warmongering between Israel and Iran on the rise.

Oil Markets

The Middle East geopolitical escalation and fragile supply-demand dynamics continue to tighten on the prospects of an ongoing collapse in Venezuelan output and the impact of US sanctions on Iran which will be realised toward the end of 2018. While the Iran curiosity should remain front and centre, Venezuelan production could nosedive further after ConocoPhillips clawed about US$650 million in assets belonging to PDVSA not only choking off their ability to export but also leaving Venezuela’s cash-strapped government in futile search of precious US  dollars.

ConocoPhillips has won court orders allowing it to seize PDVSA assets on Caribbean islands, including Curacao, in efforts to collect on a $2 billion arbitration award linked to the 2007 nationalisation of Conoco assets under late leader Hugo Chavez.

Heading into the weekend a combination of position squaring ahead of weekend headline riks and the rise on rig count saw WTI Crude Oil prices fall 1.4 % from  the weekly high water mark

On the Baker Hughes tally not unexpectedly with WTI surging on the back of Iran sanctions, US shale producer added ten oil rigs in the week to May 11, bringing the total count to 844, the highest level since March 2015. But on the flip side,  frackers remain well off their heyday numbers suggesting drillers are in no rush to let loose a supply oil gusher while hoping for higher and more prolonged returns.

However, with the bulls clearly in charge and the price floor appearing well entrenched for the remainder of the year, best to be cognizant of downside risk as complacency in oil trading has been the downfall of many. The one possible concern is the developing indications that point Saudi Arabia alleviating the effect of the sanctions by increasing output to counter the Iran disruption. But that also raises the spectre that other OPEC countries will follow suit which could put the current OPEC supply deal in jeopardy.

Gold Markets

Gold continues to be driven by the US dollar and rates causing the markets continue to consolidate at the low end of the year range due to the stronger USD.But with US yields testing the 3 % level in 10 Yeas UST, rates are also weighing on on Gold sentiment, despite wobbly equity markets and the abundance of geopolitical headline risk. And predictably appetite has been dwindling on the futures markets with the laters  CFTC data running at about one-third of their all-time high level. The failure to see any significant top side momentum along with the resurgent dollar has seen hedgers pare back positions while putting their money to work on riskier bets.

But the combination of geopolitical headline risk and long-term negative outlook on the USD  continues to advocate the gradual build of position on dips. However, the market is overly cognizant of the Fed rate hike in June and the fear of the Fed could dents sentiment near-term and demand continues to consolidate.

Gold bulls will be left to grind it out over the next few weeks until the worm eventually y turns on the US dollar which could trigger a significant move higher on Gold if the long-term negative USD  trend emerges. Treat Gold trade as a marathon not a sprint over the near term.

 

Around the Currency Horn 

USD: The combination of a lower than expected CPI and less extend long EURUSD positioning has temporarily taken the wind out of the dollar sail.  The next USD trigger will be the US Retail Sales release, where the USD dollar downside could be exposed on weaker print but how far this could induce a dollar sell-off is not so clear-cut.  Given the dovish display by other central banks, the lonely Federal Reserve Board appears to be the last man standing as speculation about interest rate rises and policy normalisation in the eurozone, Japan and Britain get kicked down the road. Suggesting the dollar should remain rented at the minimum over the next few weeks, none the less the politically challenged greenback is building a convincing argument for some longer-term views. But overall it remains testing to see just how much the EURUSD can fall given the inflationary aspect of the weaker EUR not to mention the enormous rally in crude oil over the past two months which could reignite inflation on the continent.

EUR: Short-term views will continue to be driven by economic surprise indexes which continued to favour an extended bullish  USD position over the near-term. But just how much more juice can be extracted from the differential play remains a question. EURUSD YTD lows should form a significant base.

JPY: Which echoes  the broader market sentiment that continues to ebb and flows without any real conviction on the back of  equity  risk plays  and US Yields

GBP: BoE vote split was dovish. The sizeable down move could be viewed as overextended. The  BoE next policy move is higher, but as we say in the business, “its hard to argue the direction.”

NZD: This has been a favourite topic of discussion amongst my circle. New governor Orr was dovish noting symmetrical risks around next move but its unlikely they will cut rates so 69 should remain firm given that there was limited follow through after the initial knee-jerk last week.

AUD: Despite the short covering rally, with ongoing weak data and dovish RBA suggests the AUD remains prone. Aussie short positions are much cleaner, to dealers will be quick to re-engage Aussie shorts on USD dollar strength.

CAD:  USDCAD remains exceptionally volatile as confidence continues to decline and accelerate on NAFTA talks. But there may be too much  CAD bullishness baked into the May BoC meeting. The BoC is finding themselves in the same position faced by RBA where tapping the brakes to curb excessive borrowing can have serious adverse side effects with household debt skyrocketing.

TRY A fair bit of vol last week as the Lira recovered somewhat on speculation policy makers may take action to defend the Lira  But traders are all too knowing that such types of interventions seldom produce long-term effects and the market is back selling the Lira into weeks end. The TRY could continue to trade from a weak hand this week.

EM Asia :Let the chips fall where they may

EM Asia: Let the chips fall where they may

Malaysia 

Attention will be focused on the Malaysian onshore markets this morning after PM Mahathir coalition triggered the circuit breakers and imposed a cooling off period for cash markets by declaring the two-day public holiday. Without cash markets and critical Malaysian pension fund support, it’s difficult to take to much away from the post-election   USD dominated arbitrage flows on the iShares MSCI Malaysia ETF (EWM). Or for that matter, the hostile moves on the fragmented and thinly supported USDMYR one-month NDF. The reaction on MYR  proxy trades, including the USDSGD, were far too splintered and inconsistent exhibiting hallmarks of extremely confused markets.

While conventional logic suggests, there could be equity outflows today, however, the degree to which local Pension Fund buying supplants these moves will be the key. Not to mention the possibility of BNM intervention on the unlikely scenario the market goes completely sideways.

But the tale of the tape will likely focus on PM Mahathir pledge to scrap the GST within 100 days. As well, the market’s reaction to PM Mahathir cabinet with the inclusion of former BNM governor Zeti. But the dramatic drop in the inner cabinet number is what telling from nearly 35 during Najib era to only ten so far. And by all appearance, the new appointments are apparently based on merit, not patronage

USDMYR: Lets the chips fall where they may, and we could see traders on a cash market knee-jerk look to position long term views based on Malaysia’s the solid domestic economic performance, high external factors and of course higher oil prices. The wild card in the deck remains the GST and how  the debt agencies react to PM  Mahathir pledge to scrap the unpopular tax  within 100 days

USDSGD: Of course the market looks to trade the tight correlation with the CNH, but in the meantime, we could see some Proxy interest regarding the MYR elections fall out take place.

China 

MSCI is expected to announce the results of its semi-annual index review at 5 am HKT on Tuesday morning. China A-shares will be added to the Emerging Markets index for the first time, and the list of names to be added to the index will be confirmed. Given that most of the likely constituents have underperformed this year, the market reaction to the anticipated announcement will be crucial for short-term sentiment.

USDCNH: Short-term CNH  sentiment could take its cue from the key markers retail sales and industrial production data due out later this morning. But the ongoing malaise around trade and tariffs have turned traders jaded which is being exacerbated by  PBoc steering the currency ship as steady as can be.

India 

Indian markets could be hit again this week as local stock exchanges could feel the repercussions from a potential MSCI de-classification of the Indian equity market from the Emerging Markets index after the Indian Finance Ministry and the Indian Exchanges where previously scolded about pulling licensing deals with foreign bourses.

USDINR: The beleaguered Rupee, hampered mostly by surging oil prices and  to a lesser degree the stronger USD, could be on the offs again this week  from a potential MSCI de-classification of the Indian equity market from the Emerging Markets index

Indonesia

The  Bank of Indonesia on Thursday after the Central Bank Governor hinted yet again that interest rates would be raised to defend the currency and stabilise the market.

USDIDR: With the central bank putting stability ahead of growth, it suggests that any short-term IDR appreciation could be meet with cynical dollar buyers.

Philippines

The USD  losses at weeks end were a welcome relief to Asian equity markets, especially twin deficit countries like  The Philippines, that has been one of the weakest links in the EM Asia chain.

However, on the currency markets, the midweek reprieve should not be interpreted as a trend reversal but rather a  squeeze from overbought USD  positioning.

While local PSEi investors welcomed the BSP  dovish rate hike, but profoundly pessimistic  currency traders quickly re-engaged the long USDPHP trade who are all too knowing that one-off interest rate hike band-aids seldom produce any positive long-term currency effects

USDPHP: Some stops losses were triggered through the 52.25  after currency traders viewed the BSP  one and done interest rate hike as distinctly dovish. While sentiment remains weak heading into the pivotal US retail sales print, the PHP should trade with a high level of sensitivity to the USD, but traders could look for dip buying opportunities over the near term given the dovish rate hike.

Dollar Ends Rally Awaiting US Retail Sales Data

The US dollar rally lost momentum during the week and recorded its third day of depreciation versus other major pairs. The USD continues to gain versus emerging market currencies as more signs of a global growth slowdown appear. The US consumer price index (CPI) came in under expectations and raised concerns on how many rate hikes could the Fed get way with in 2018. Retail sales data will be published on Wednesday, May 15 at 8:30 am EDT. The changes to the tax code are touted as a victory for the White House but consumers will have the final say on its impact on spending.

  • US Retail sales expected to keep rising at steady pace
  • Oil prices to keep rising as uncertainty remains in the Middle East
  • NAFTA negotiations to continue as US President Trump still critical of deal

USD Loses Momentum with Retail Sales Hurdle Ahead

The EUR/USD lost 0.08 percent in the last five days. The single currency is trading at 1.1950 as the USD depreciated as investors closed their long dollar positions. European Central Bank (ECB) President has stated that there are concerns about European growth, which could translate into lower rates for longer even as the U.S. Federal Reserve keeps tightening monetary policy with an expected 2 to 3 more rate lifts this year.



European indicators to keep a look out this week include the preliminary figures of German Gross Domestic Product (GDP) due on Tuesday, May 15 at 2:00 am. The EU will also publish the flash GDP figures at 5:00 am EDT. Both numbers are expected to show a gain of 0.4 percent. German Economic Sentiment published by the ZEW had a shock drop last month and that trend is expected to continue with a –8 reading as institutional investors and analysts remain pessimistic about the German outlook.

The final estimate of the European consumer price index (CPI) will be released on Wednesday, May 16 at 5:00 am EDT with a forecast of 1.2 percent.

Canadian Dollar Higher Due to Oil Price Lift

The USD/CAD lost 0.52 percent during the week. The currency pair is trading at 1.2781 as the loonie had a volatile week after the US announced it would be pulling out of the Iran nuclear deal. The price of oil pushed higher and took the CAD along for the ride. The USD lost momentum with the release of weaker than expected inflation data on Wednesday. Less inflationary pressure could end up with the Fed shelving a third rate hike from the already priced in 2 upcoming ones this year.


Canadian dollar weekly graph May 7, 2018

The Canadian dollar closed the week on the wrong foot with employment data missing the forecast with a lost of 1,100 positions instead of the gain of 18,000 jobs. Wages rose at a 3.3 percent clip and buried in the report was the fact that Canada had added 28,800 full time jobs. The data continues to be mixed but could put the Bank of Canada (BoC) off from hiking rates just yet. The market expects at least a rate hike in 2018 so the central bank can close the gap with the U.S. Federal Reserve.

Inflation will be key at the end of the week with the release of the Canadian CPI data on Friday, May 18 at 8:30 am EDT. Inflationary pressures have been positive as the Canadian economy seems to have gotten out of the growth slump, but outside factors remain on the BoC radar. The NAFTA renegotiation has accelerated in the last month, but now it has reached a difficult point as the US deadline approaches. The deadline is an arbitrary date on May 17, but if all three nations can’t agree on a way moving forward the hard deadline of the Mexican Presidential elections on July 1st could push any probabilities of a new round of negotiations until next year.

US President Donald Trump continues to criticize the deal as he met with representatives of the auto sector on Friday. The US team has softened its hardball tactics, but to reach an agreement it might have to do more to guarantee the other partners agree to its demands.

Negotiators from Canada, Mexico and the United States were working throughout the week and although they all mentioned great progress a deal remains out of reach. Negotiations will resume next week .

Oil Continues Upward Trend on Uncertainty of Iran’s Supply

The price of West Texas Intermediate remains above $71 in the aftermath of the US pulling out of the Iran nuclear deal. The greenback rose as investors looked to the currency as a safe haven. US President Donald Trump announced that the US would be pulling out of the 2015 nuclear agreement and would reimpose economic sanctions on Iranian exports. The move was not unexpected as the Trump administration had criticized the deal but allies were hoping the US would remain, as it stands there are still 5 nations who are backing the deal. The United Kingdom, France, China , Russia and Germany remained committed to the deal where Iran will receive no sanctions as long as it complies with stopping its uranium enrichment program.



It is still unclear what the true effects of the US ending its participation in the deal. Although sanctions will come into effect, the fact that support remains from other nations as long as Iran continues to uphold its end of the deal take some of the pain from lost oil export revenue.

Global supply is not an issue. Demand has not increased significantly which is why the biggest factor before this geopolitical event was the Organization of the Petroleum Exporting Countries (OPEC) and other major producers limiting output. The US shale industry is ready to step in and cover any shortfall from Iranian supply.

Market events to watch this week:

Monday, May 14
9:30pm AUD Monetary Policy Meeting Minutes
Tuesday, May 15
4:30am GBP Average Earnings Index 3m/y
5:00am GBP Inflation Report Hearings
8:30am USD Core Retail Sales m/m
8:30am USD Retail Sales m/m
9:30pm AUD Wage Price Index q/q
Wednesday, May 16
8:30am USD Building Permits
10:30am USD Crude Oil Inventories
12:00pm CHF SNB Chairman Jordan Speaks
9:30pm AUD Employment Change
10:00pm NZD Annual Budget Release
Friday, May 18
8:30am CAD CPI m/m
8:30am CAD Core Retail Sales m/m

*All times EDT
For a complete list of scheduled events in the forex market visit the MarketPulse Economic Calendar

GBP Slips as BoE Delays Hike and Lowers Forecasts

The Bank of England monetary policy announcement and press conference went broadly as expected today, with the central bank holding off on raising rates while maintaining that they will rise gradually over the forecast period.

The central bank had previously strongly hinted that base rate would rise today – taking it above 0.5% for the first time since 2009 – but as the economic data took a turn for the worse in February and March, the tone changed. While the central bank maintains that it believes the data deterioration is temporary, it chose to wait for evidence of this before acting causing many to question the reliability of the central bank forecasts and its forward guidance.

Governor Mark Carney was keen to stress in the press conference that, despite today’s decision, policy makers are confident that domestic inflationary pressures are building gradually and appeared relatively comfortable with the expectation of roughly two rate hikes over the next 18 months and three over the next three years. This is unchanged from February and further reiterates the bank’s belief that the timing of the next hike isn’t as important as is suggested.

GBPUSD 5 Minute Chart

 

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While the pound remained volatile throughout the press conference, the bulk of the decline after the release – more than 0.5% against the dollar – came in response to the new economic projections which forecast lower growth and inflation over the next three years. Carney may have expressed confidence in the outlook but the forecasts were less convincing. Still, markets continue to price in a rate hike this year – most likely in November – which assuming Brexit negotiations progress as planned, will be far more convenient for the central bank.

Economic Calendar

For a look at all of today’s economic events, check out our economic calendar.

Markets Flat Ahead of BoE Decision

It’s been a relatively flat start to trading on Thursday as we await the latest monetary policy announcement from the Bank of England and the economic projections and press conference that follow.

The BoE is due to announce its decision on interest rates shortly and, following an apparent U-turn in recent weeks, policy makers are widely expected to leave them unchanged for now. There has been a clear and growing desire on the Monetary Policy Committee in recent months to lift the Bank Rate above 0.5% for the first time since 2009 after inflation rose above 3%, far surpassing the central bank’s target of 2%.

While policy makers have appeared to be preparing markets for such a hike, the data has turned, with inflation falling back to more acceptable levels – albeit still above target – while quarterly growth fell to only 0.1% in Q1 and surveys on services, manufacturing and construction have underwhelmed. It may be the case that the “beast from the east” was largely responsible for much of the slowdown later in the quarter but it seems policy makers would like to see evidence of a rebound before committing to higher rates.

EUR/USD – Euro Steady in Holiday-Thin Trade, US Consumer Inflation Next

Projections, Voting and Press Conference Key

Of course there are some that may dismiss the data due to the one-off factors associated with it and so the vote may not be unanimous but the recent comments from Governor Mark Carney appeared to be an attempt to manage market expectations. The claim that the MPC is conscious that there are other meetings this year appeared to be a clear nod to the fact that May is no longer the favoured time for a hike and triggered a substantial change in pricing for it, with the implied probability having since fallen to only 13%.

With that in mind, a rate hike today looks very unlikely – albeit still possible – which makes the new economic projections, voting and press conference all the more interesting. Traders are very keen to know when we can now expect a hike which could make UK markets quite volatile in the hours after the announcement. With Brexit discussions hoping to be wrapped up in the next six months, it will be interesting to see whether the BoE hints at holding off until November until the outlook become much clearer or simply delays the decision until August.

Bank of England to deliver a ‘hawkish’ hold

Oil Makes Further Gains After Trump Announcement

In the aftermath of Donald Trump’s announcement on the Iran nuclear deal, oil has continued to rally on Thursday although the gains the are being made are now slowing. While it remains unclear what impact the sanctions – which are not backed by the other countries that signed up to the initial agreement – will have on output, the moves we’ve so far seen suggest there is a belief it will be significant.

While the countries that have been cutting production in recent years to rebalance the market could offset the void left by the sanctions, it’s not clear that the appetite will be there to do so and the reaction in the markets suggest traders are assuming they won’t. With Brent crude fast approaching $80 a barrel and WTI above $70, it will be interesting whether the same appetite for cuts will remain in the months ahead and if not, whether prices may be peaking.

WTI and Brent Crude Daily Charts

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Economic Calendar

For a look at all of today’s economic events, check out our economic calendar.