Weekly Market Insight - December 11th 2017 - London Academy of Trading

What moved the market in the past week?

The November Non-Farm Payrolls report posed no threat to the Fed’s plans to raise interest rates on the 13th.

With 228,000K job growth (ahead of expectations at 200,000) and 0.2% wage growth, the U.S. labour market is certainly robust enough to withstand the next notch in rate normalization.

Non-Farm Payroll is the most critical of all global economic metrics and yet over the past week, its impact on foreign exchange was overshadowed by the Bank of Canada’s rate decision and the Brexit deal.

The Dollar closed out the week higher against all the major currencies and now thoughts will start looking ahead to see if it will continue to post gains into the close of the year.

One has to say that there are several reasons to expect the Dollar to retain a firm footing.

Firstly, one must look at tax reform tax reform. The desire from the Republicans to get the deal concluded before the end of the year should, in theory, offer a positive bias for the Dollar.

Secondly, one should factor in the tax holiday that is on offer and so many Dollars will be repatriated by U.S. corporations before the year closes to lower current tax obligations. This process creates demand for the Dollar, however, one should recognise that some foreign earnings could already be denominated in Dollars. So, the magnitude of the impact is hard to define.

Thirdly, the Fed will raise interest rates in the week ahead (futures price this with a 98% chance) and even if Fed Chair, Janet Yellen is cautious with her forward guidance, the prognosis for gradual rate rises may remain unchanged. Why so? The reason is that the trajectory that has been suggested has been fully supported by Mr. Jerome Powell, who will take over as Fed Chair in February.

Of course, there are doubts

Fed fund futures are currently pricing in a 62% chance of another quarter-point move by March 2018 and an 80% chance by June 2018. That said, there are questions just under the surface in that even though job creation was strong in November and average hourly earnings increased, wage gains remain muted and that hampers consumer spending.

Inflation is also low, CPI edged up 0.1% MoM in October of 2017, lower than a 0.5% rise in September. On a YoY basis, the changes were 2.0% cf. 2.2%. Similarly, there’s been a slowdown in service and manufacturing activity.

We see the Dollar staging a rally into FOMC and year-end, it could still fall post the rate announcement, giving investors the opportunity to buy at lower levels.

Meanwhile, in Europe

The breakthrough in Brexit talks was the biggest European story last week. After weeks of intense negotiations surrounding UK payments and the Irish Border, a “historic deal” was reached on Friday that allows the EU and the UK to move to Phase 2 of the talks. Surprisingly, Sterling dropped on the news as investors see key issues still unresolved and Michel Barnier, the EU’s chief negotiator said the next phase of Brexit talks could be tougher than the first.

Forex

EURUSD fell to lower closes every day this past week despite the potential support of healthy data. The Euro is also pressured by Germany’s political troubles as the SPD appear to be dragging Angela Merkel to the left as a price for rescuing her Chancellorship in a “Grand Coalition”. SPD leader, Martin Schultz appears far more aligned to the “More Europe” stance of French President, Emmanuel Macron. The Euro may well be put under pressure if the issue of “Sovereign Debt Mutualisation” gets back onto the agenda in 2018.

Thinking about commodities, all three key commodity currencies traded lower this week with the Australian Dollar falling to a 6-month low against the U.S. unit, while the New Zealand Dollar also lost ground against the greenback, although a small gain in dairy prices helped to ameliorate the currency’s slide and pushed the AUDNZD cross below 1.10.

The worst-performing currency this past week was the Canadian Dollar; undermined by the Back of Canada’s (BoC) monetary policy outlook. To everyone’s surprise, the BoC chose to overlook all of the recent data improvements, focusing instead on moderating growth, considerable trade and geopolitical uncertainty and the ongoing labour market slack. It clearly stated that heading into the New Year, it has no immediate plans for tightening

And then there is Bitcoin:

The newest way to bet on Bitcoin, arrived on Sunday, December 10th when Bitcoin futures start trading.

The first Bitcoin future trades are set to kick off at 23:00 GMT or 18:00 EST (2300 GMT) on CBOE Global Markets Inc’s Futures Exchange.

The launch gave BTCUSD a new burst of energy this week when it traded past to 17,153.20, before falling back dramatically. It has nearly doubled in price, it is hard to say “value” since the start of December. However, recent days have seen sift and sharp swings in both directions, with Bitcoin losing 22.2% since the peak level last week.

Naturally, many participants are upbeat about a regulated way to bet on or hedge against moves in bitcoin, others are urging caution that risks remain for investors and possibly even the clearing organizations underpinning the trades.

Commodities

Crude oil prices settled higher on Friday as stronger Chinese crude demand and fears over possible supply disruptions offset signs of rising U.S. output. This week’s U.S. rig count, an early indicator of future output, ticked up by two oil rigs to a total of 751, oilfield services firm Baker Hughes reported on Friday.

On the New York Mercantile Exchange crude futures for January delivery rose 1.2% to settle at $57.36/ Barrel, while on London’s Intercontinental Exchange, Brent gained 1.6% to trade at $63.19/Barrel.

Gold prices remained on track for a third-weekly slump as risk-on sentiment continued to support dollar strength, pressuring demand.

Gold futures for February delivery on the Comex division of the New York Mercantile Exchange fell by $4.00, or 0.34%, to the $1249.00/Troy ounce.

Economic Calendar

On Tuesday at 10:00 GMT watch the German ZEW Economic Sentiment Index for December. Expectations are for a dip to 17.4 from the reading of 18.7 in November. At 13:30 there will be U.S. PPI for November where 0.3% is forecast, down from 0.4% in October.

On Wednesday, Sterling could be undermined as the Claimant Count Change in November due at 09:30 GMT should rise to 4,000 from just 1,100 in October. Then at 19:00 the Fed will announce the results of the FOMC where Federal Funds should be nudged higher by 25bps to 1.50%.

Thursday will see both German Manufacturing and UK Retail Sales come in lone, close to the past readings and then around the midday mark both the BoE and ECB leave rates unchanged.

At 13:30 GMT when Draghi may still be speaking at the ECB press conference, do not overlook the release of U.S Core Retail Sales. Look for a gain of 0.6% in November from 0.1% in October.

Have a great week!

Written by  Stephen Pope, LAT Senior Lecturer.

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