Weekly Fundamental Dose: 12 – July – 2018
While short-lived lull in Sino-US trade-war and upbeat US PPI helped the USD to recover most of its last-week’s losses, developments concerning WTO ministers’ meet, Theresa May’s new Brexit plan and US CPI could play their role in entertaining market-players going forward.
Let’s discuss fundamentals relating to each one of them.
Lack of Supportive Factors Dragged The USD Downwards Last-Week
Not only Fed policymakers division over how many rate-hikes can take place in 2018 despite upwardly revised dot-plot but sluggish job report and rejuvenated US-China trade-war dragged the US Dollar Index (I.USDX) towards a negative weekly closing. The EUR, on the other hand, benefited from the greenback’s decline and political peace at Germany whereas Theresa May’s ability to get her Brexit proposal passed at Cabinet & welcome UK PMIs propelled the GBP. While activation of trade-tariffs triggered risk-off sentiment, the JPY & Gold benefited from the same when the USD was weak whereas AUD & NZD took advantage of China’s positive numbers & recovery in commodity basket. In case of the CAD, dropping US crude stockpile & global supply threats helped Oil prices extend its north-run, which in-turn was aptly enjoyed the Loonie as Crude is Canada’s highest export-earner.
Tale of Ups & Downs In Trade-Tussles And Latest Economics
Even if US & China began the formal trade-war at the end of last-week, investors felt a sigh of relief at the week-start as expectedly positive outcome of earnings season and US President Donald Trump’s EU visit spread optimism among market-players. However, the same couldn’t last-long when Trump administration released fresh list of $200 billion worth of Chinese products to bear additional 10% duties starting from September. The same did threatened the recent recovery in commodity-linked currencies while the US Dollar managed to rally as EU’s ZEW Economic Sentiment numbers were disappointing. Adding to that, US PPI marked the strongest gain in more than six years and strengthened speculations favoring increased pace of Fed rate-hikes, which then helped the US Dollar to post across the board rally. As a result, the JPY & Gold had to plunge whereas AUD, NZD & CAD dropped on worries for their future demand based on commodity-basket.
Looking forward, the GBP again came under pressure when Theresa May is ready to propose another plan, after two of her leading policymakers resigned, that offered different trade treatments to Goods & Services after Brexit and is less likely to be accepted by their EU counterparts. At the end, the EUR couldn’t digest Mr. Trump’s angst against Germany over its Russian pipeline project and the greenback’s strength whereas Crude prices dropped heavily despite US declining US inventory details as pessimism at trade-front and Libya’s readiness to re-start exports challenged energy Bulls.
Review of China Trade Policy, US CPI & Theresa May’s ‘New’ Brexit Proposal Are Crucial
Having witnessed sustained market support for the USD, despite trade-wars, coupled with welcome PPI, investors are preparing to conquer the upcoming week based on various Eco-Politico factors. Amongst them, Thursday’s monthly reading of US CPI and Theresa May’s presentation of new Brexit plan, followed by review of China’s trade policy at WTO and US Prelim UoM Consumer Sentiment on Friday, could become highlights for rest of the week.
Starting with the crucial price-gauge for the U.S., the CPI, the inflation indicator is likely follow PPI’s foot-steps and may strengthen Fed’s outlook for two more rate-hikes during the month. The CPI (YoY) is bearing consensus to post 2.9% growth against 2.8% prior while MoM figure may remain unchanged at 0.2%. For the Core CPI, yearly figures may register 2.3% mark compared to 2.2% earlier with no change expected for monthly stat of 0.2%. Hence, while monthly numbers are more likely to remain stable, yearly figures can please the greenback Bulls if meeting market expectations.
Moving towards the UK PM Theresa May’s ‘New’ Brexit plan, Mrs. May seems tired of her colleagues’ arguments over free customs region for Goods after Brexit and hence thought of challenging them with 100-page proposal for a different treatment to services which accounts for majority part of the British GDP. In her proposal, Mrs. May can put forward a different treaty for UK-EU and UK-rest of the world services’ trade while the goods trade between Britain & EU may not have any restrictions. However, there are still many other issues except the customs region, like Irish border, details of European Court of Justice and many other plans that EU & UK have jointly started, that can make her future leadership continuously worrisome.
Coming to Friday’s WTO’s review of China’s trade policies, US President has already blasted at WTO by saying that the union isn’t capable of reckoning China’s trade-tactics. However, the global trade union has offered a strict review of the dragon nation’s trade policies when not only US but EU, Japan & some other developed world nations have also complained against China’s unfair trade practices. Hence, if China is found guilty of treating its trade-partners unfair, US may have an added advantage while bargaining with the Chinese authorities to loosen its trade-restrictions. Moreover, China may find it hard to sustain amid global competition and trade-restrictions and may end-up hurting the commodities and commodity-linked currencies like AUD, NZD & CAD.
At the economic calendar, China’s Trade Balance release is likely to start Friday with another negative sign for commodity traders if matching 188B surplus against 157B prior as increasing surplus can raise problems for the nation specially at the time when global leaders are against its trade policy. In case of the U.S. Prelim UoM Consumer Sentiment, the consumer confidence gauge may soften a bit to 98.1 from the 98.2 mark posted last-month.
To sum up, China is likely to have tough days ahead be it expected negative developments at WTO or from the U.S., which in-turn can further drag the commodity-linked currencies like AUD, NZD & CAD downwards. The USD, on the other hand, may gain as upbeat inflation and growing acceptance of Mr. Trump’s tough stand against China can keep pushing traders towards greenback.
Further, political problems at Britain may keep hurting the GBP whereas EUR, JPY & Gold may have to bow down in front of the USD’s strength. In case of the Crude, energy traders may curtail their longs favoring oil prices as trade-tussles and expected increase in global production are likely to play their role going forward.
With the 50-day SMA & short-term descending trend-line aptly restricting the EURUSD’s upside, the pair is likely to revisit the 1.1600 and the 1.1540 supports before aiming the 1.1500 during further declines. However, an upside break of 1.1735 TL could trigger the pair’s rally towards 1.1840 and then to the 1.1935-40 resistances. In case of the GBPUSD, the pair recently dipped beneath the immediate upward slanting TL, at 1.3255 now, which signals the pair’s additional drop to 1.3145 and the 1.3110 rest-points while sustained trading beyond 1.3255 can have 1.3300 trend-line and 50-day SMA level of 1.3335 as follow-on barriers to conquer in order to target 1.3385 & 1.3450 numbers to north. Moving on, the USDJPY can now look for 112.80, 113.40 and 113.80 till it trades above 112.30 with 112.00 and 111.40-30 being strong downside levels to watch whereas USDCAD needs to conquer 1.3265 in to regain its status above 1.3350 but a downside break of 1.3050 TL can print 1.2960 as quote. Furthermore, AUDUSD indicates 0.7300 and 0.7230 to appear on the chart with 50-day SMA level of 0.7490 being nearby crucial resistances while NZDUSD can test 0.6715 & 0.6625 during ifs further south-run with 0.6780 & 0.6835 acting as short-term important resistances.
Have a nice trading-day ……