FX & Futures Analysis by Earn2Trade October 16, 2018

779 Billion Deficit

Yesterday the US Department of Treasury reported the highest budget deficit of the past six years. There was a 779 billion dollar deficit at the end of the 2018 fiscal year. The deficit reached a record high despite the 119 million surplus in September. President Trump’s tax cuts and the proposed budget deal in February left a large void that the even the rapidly growing US economy couldn’t fill. The Fed’s continued interest rate policy also contributed by raising the cost of financing the deficit. The rising yields of US treasury notes could also pose a large problem in the future as it becomes increasingly more expensive to finance them. These latest figures should serve as a warning sign. Unless government spending is reined in, US national debt could become unmanageable.

Twists & Turns

Trends reversed at the drop of a hat on multiple occasions during today’s Asian trading session. At first it trended upwards due to US markets previously closing with positive results, then it turned around after the release of China’s inflation figures and Producer Price Index. Finally it reversed once more at the end of the day when the buyers took charge again. Even so the Shanghai exchange still closed with a loss of 0.85%. Nikkei on the other hand rose by 1.25%, making it stand out among other Asian indices today. Meanwhile the price of oil started declining as it appears that very few took US threats to place sanctions on Saudi Arabia at face value. At the same time the precious metals market saw a major rally as gold climbed above $1230 once more.

GBPUSD

There are only 165 days left until the United Kingdom’s European Union membership is terminated. This week will be an important one for the London government as they have to present their proposed solutions for the disputed sections of their exit agreement in front of a council of European Foreign Ministers. According to the latest news, the most divisive question is that of the border between Ireland and Northern Ireland, which the UK delegation still has no real answer for. Meanwhile today’s the release date of the latest UK labor market report in addition to retail sales and inflation figures later this week. All of these events are bound to generate major movements for the British pound.

The pound has actually performed exceptionally well against the USD recently. It’s price has been on the rise since October 4 until last Friday when it reached 1.3250. Following this 300 pip increase, price reversed it’s direction with a 170 pip correction. The correction was halted by the 1.3083 support line and price has continued to rice since. The correction still managed to break through the rising trendline during it’s initial descent and is now moving just under the trendline parallel to it. If the pound can successfully break through the 1.3190 resistance line, then it would both confirm the rising trend and paint 1.3250 as the next target. Much of it may depend on the upcoming macroeconomic data releases.

US 10-year T-Note

The ongoing cycle of US interest rate hikes became notable in that the resulting strengthening of the dollar significantly set back the competitiveness of US products on the global market. The dollar strengthened against almost every other currency since the time the Fed initially started periodically raising interest rates. This process presents a growing problem for the Trump administration. The strengthening dollar effectively wiped out the desired effect of the tariff policy, resulting in trade balance remaining largely unchanged. The enormous budget is another factor to consider when looking at the rising interest rates. Going only by the current 779 billion dollar deficit, at a 2.25% base interest rate it would take 17.5 million dollars to finance, which is double what it should have cost only one year ago. It’s well known that the USA’s national debt is now above 21,500 billion dollars and raising interest rates on it by 1% results in 215 billion dollars of additional spending. At this point putting the breaks on treasury note yields may need to become one of the Trump administration’s main objectives.

The price of 10-year US Treasury Note futures clearly illustrates the rate at which yields increased. Since August 2017 price declined from 120 to 117.50. Trump’s attempts to pressure the Fed may be politically questionable, but the rationale behind it is economically sound. Stopping the debt spiral may be more crucial than dealing with a much less dire 2.3% inflation rate and he potential solution of keeping interest rate hikes in check could lead to bond prices rising, thus weakening the dollar. Hopefully the astronomical budget and trade deficits will put a break on upcoming rate hikes.

Sincerely,
Laszlo | Market Analyst

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