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Forex, Market News

This Week: Greenback surge to be confirmed or denied, Australian figures to test Markets sentiment, and oil positions to be evaluated

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US Dollar Strength getting the better of its Australian counterpart, will this continue? Events to be taking place this week may hold the answer.

The Australian Dollar continued to slide last week after the quarterly consumer prices data was released. Data showed that the consumer prices rose by 0.4% in the quarter. This was lower than last quarter’s data of 0.6% and the 0.5% traders were expecting. On an annual basis, the CPI rose by 1.9%, lower than the 2.0% economists and investors alike were expecting. Figures have been decreasing consistently, highlighting overall weakness in the economy.

The data, in conjunction with lethargic wage growth eradicates the urgency for the RBA to hike interest rates in the near future. This notion is further supported by a field of 41 economists from Reuters who were polled on the idea of a hike this term, 40 of whom maintained the perspective that rates will remain steady.

Goldman Sachs analysts concluding that although the Fed is still holding at the projected 3 hikes in 2018, the markets are expecting 4. Notably, issues highlighted relating to the Feds Challenge moving forward will be to introduce policy tightening that will slow growth to a sustainable level without tipping the economy back into recession. Loretta Mester, President of the Federal Reserve Bank of Cleveland, and voting member of the FOMC, has also sided with the above view, indicating that gradual hikes are necessary to avoid overheating and further financial stability risks.

If the Fed does raise rates for the second time in 2018, we can expect to see substantial volatility following the statement release. Some of the results of an interest rate increase, as well as an indication to raise rates for a 4th time this year ( above the stated 3 ), will include a strengthening in the US Dollar, a spike in Utilities & Financial companies, a weakening of foreign currencies, and commodities. We would also see mortgage rates go up as Treasury yields will increase.

As it currently stands, Traders, Bankers, Economists and Investors alike are tipping that chances of a hike at this week’s decision are rather low.

Non-Farm Payrolls, the Unemployment Rate and Average Hourly Earnings for April are scheduled to be released this Friday. Put simply, should the figure show that the economy created more jobs than expected, or if average hourly earnings jumped higher, we will likely see the markets go higher, the US Dollar go higher and oil go lower. Should these numbers disappoint, the markets will likely go lower along with the greenback. Economists will also be looking for any signs that last year’s tax cuts have increased wage growth, or if the savings all just went into dividends and share buy backs. Like in previous months, the Unemployment Rate may drop but average hourly earnings will continue to stagnate, which is what the market is anticipating, deviation from these figures could see opportunities present themselves for the short-term dollar traders.

With Oil in the forefront as it trades at 4 year highs, Traders will be watching the latest Crude oil Inventories release this week. Should inventories increase in the latest reading, we can expect to see the price of black gold decrease. Should we see inventories draw down more than anticipated, we can expect to see the cost increase. Furthermore, if the cost of oil does increase, we can see companies in the transportation sector will likely move lower.

 

Stephen Sismanis

Director
SDS Perpetual Equity

Emerging Markets, Forex

China’s Move to Overthrow the Dollar: Will It Be a Success?

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China’s Move to Overthrow the Dollar: Will It Be a Success?

China is known as one of the fastest-growing major economies worldwide. Despite this, its currency is barely used in the global market, placing it just next to pound, euro, and yen. This year, the long-held desire of China to overthrow its competitors will likely get a boost.  Bitcoin helped crypto markets reach new highs, as well.

At present, China is considered to be the largest importer of oil in the world. Last October 2017, Russia sold an S-400 air defense system to Saudi Arabia and such move symbolized a big shift eastward for the Kingdom. China has managed to finally persuade KSA to accept its currency, Renminbi or RMB (also known as yuan in international contexts), as a payment for oil. As a result, China saw this success as an indicator of the increasing power of RMB and a stepping stone towards challenging the world’s most powerful currency, the dollar.

Pricing oil in its own currency

Aside from pricing one of the most important global commodities, China is aiming to overthrow the dollar to lessen its dependency to it, and to reduce its exposure to this currency as well as to its politics. In order to do this, China plans to further price oil in its own currency through a futures contract.

  • China has opened more than 6,000 new forex trading accounts for this contract. China will most likely rely on state-owned oil companies to use the new RMB forex trading contract. By doing so, the number of trade activities may increase and sufficient liquidity may be generated.
  • China will likely approach its major oil suppliers in different regions in Russia, Middle East, and other parts of Asia (those who have already accepted RMD as a payment for oil).

Predictions in 2018

Interestingly, a number of analysts believe in the possibility that China might become successful in this endeavor. Market acceptance may be somewhat cold at first but may turn better over time. When this happens (as the Chinese hope), the percentage presence of yuan in the currency reserve basket will greatly increase; thus, ensuring a runaway success.

  • On the other hand, many analysts think that it is still too early to think about RMB’s currency dominance. The hardest challenge in China’s goal is to ensure that no country or entity should have a dominant advantage over the others. The Chinese central government still play a huge role in the nation’s energy division sector, despite being it the fastest growing and largest consumer of energy in the world.
  • Some analysts believe that if China puts too much state control in the global oil market, things may occur in any other way. Such manipulation may also hinder the drive to create a reputable oil pricing benchmark that is capable of competing against more reputable benchmarks. Given this, many would most likely expect that a Chinese currency-dominated oil benchmark will only be working under China’s control.
  • Apparently, another major hindrance standing in the path of China’s goal is RMB itself. To date, RMB is not yet readily convertible and is prone to various interventions and capital manipulations, and favoritism toward Chinese business companies.
Forex, Long Ideas, S&P 500

Will The Fed Stall Stock Markets?

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Will The Fed Stall Stock Markets?

The US Federal Reserve is a regional bank that is the central banking system of the United States. Operated by the Federal Open Market Committee the bank is responsible for implementing monetary policies as well as controlling the economy of the country. The US dollar is the prevailing currency of the USA, and this can be traded using the forex trader platforms offered by easy market.

Since the financial crisis that hit the country in 2008, the Federal Reserve has held on to keeping the interest rates as low as possible for more than seven years in order to help recover the economic state of the country. As much as this move is positive, some economists claim that it is setting up competitive pressure that is increasing credit risk, weighing on bank returns and pushing money lenders to compete for more for borrowers.

Monetary Policy:  The End of QE

However, the most recent time when the US central bank raised its interest rates was back in December promising to raise the rate about four more times in the years 2016. Later on, the bank reported that it would only raise the rates twice in the year. The bank explains that it is safer to proceed moderately considering the prevailing economic risk in order to verify the strength of the labor market.

Furthermore, in a statement released after a two-day meeting in March this year, the chair of the Federal Reserve put forward that the central bank had put on hold a further increase in the interest in the US. This came as the opposite of what the majority was expecting. Most people expected that an announcement regarding an increase in interest rates.

Historic Interest Rate Levels

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The Federal Reserve resolved to keep the rates between 0.5% and 0.25%. For this, it claimed that though the labor market is strengthening, it still targets reaching a 2% inflation rate which will see the US economy expanding moderately. This comes after a recent decline in energy prices globally and a low inflation rate internationally.

Most economists expected the chair Janet Yellen to hint at the two interest rates hikes that were promised earlier down from the four previous ones that were revoked. Probably, the hike has been postponed following the slowdown in China or global market uncertainties and with the next meeting of the Federal Open Market Committee scheduled on June 14-15, it is expected that there may be a hike in the rates.