Fibogroup Market Analysis 2017

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The British pound is trading higher today after as the EU and the UK move onto the 2nd round of talks surrounding Brexit which promises to be a hard-fought slog.

Now that the issue of immigration and border control is out the way, the focus is now on trade talks which is bound to be even more difficult as both sides are refusing to budge n several points.

The British government had wanted to restrict the movement of EU citizens from travelling freely through the UK while at the same time signing a free trade deal as was the case when the country remained in the European union.

From the EU’s point of view this is not an option and just goes to show how much needs to be done before a deal is reached and may put the pound under pressure until things are clarified.

“These are going to be the things that are very dominant for sterling whether or not there’s going to be more tension in May’s government, whether or not there’ll be tensions with the EU,”

said Jane Foley, head of foreign-exchange strategy at Rabobank International in London.

“The bones of negotiations will be of particular interest. “she added.

The British government also suffered a humiliating defeat in parliament last week as members of Prime Minister Theresa May’s own conservative party backed a motion to give parliament the final say on any Brexit Negotiations.

The fear is now that in the end this may lead to a hard Brexit with MP’s refusing to give ground to the EU on trade deals which if happens is also expected to hit the pound hard.

“Sterling is still carrying a premium reflecting risk of a hard Brexit. Over the next two months, the tone will be set.” Mrs Foley said.

 

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The Australian dollar has had a good run over the last week climbing from a low of US75.50c to around US76.60c in today’s trading session but some say the rally may be about to end due to local and external news due for release this week.

The minutes meeting released earlier today from Australia showed the RBA was satisfied with the overall performance of the economy and noted that they expect the jobs market will keep improving in 2018 and wage growth will also pick up which has so far proved to be a real burden on inflation.

The major concern the RBA had was the level of household debt and low inflation which may be a reason to keep rates on hold for quite some time.

With no other major news due out of Australia this week, the focus will be on the US with Donald Trumps proposed tax reform due for a final vote and if the news coming out of America is too be believed, the tax bill is certain to pass and be signed into law by Trump.

Just how much the tax reform bill is priced into the market is anybody’s guess but it seems as if when it is finally passed, the US dollar is in for a big rally at the expense of all major currencies including the Australian dollar

"A further break higher is likely to be difficult with an expected mixed local data pulse this week and the passing of US tax reform, which should be USD positive in the short-term," said Con Williams, economist at ANZ Bank.

 

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The US dollar has remained under pressure in the last 3 trading sessions which is strange inlight of Donald Trump’s tax plan which is certain to become law by the end of this week.

The last 2 remaining hurdles are confirmation on the amended plan by the US House of Representatives followed by a signature from Donald Trump and the law will take effect 12 days later.

There has been much talk about the new tax legislation and how it will benefit the US economy so why has the US dollar failed to rally and instead has been under pressure since it became obvious the tax plan would pass?

On first glance the tax reform package looks promising with corporate tax rates being reduced to 20 percent and personal income tax rates are being reduced across the board. But on closer look, it seems as the reforms will benefit the wealthy the most and as a whole, is not so beneficial for the overall economy

“Any boost to the economy would be small and there is nothing in the final bill to change that view,” said Andrew Hunter, A U.S. economist, at Capital Economics in London

“There is little evidence linking corporate tax cuts to stronger growth,” Hunter said. “There are few examples either historically in the U.S. or internationally of lower corporate taxes resulting in a significant and sustained boost to business investment.” He added.

The worry for the greenback now is that most of the good news is factored into the market and public sentiment on the reforms will now dictate the effectiveness of the biggest tax overall in 30 years.

If that sediment turns sour, the US dollar may be in for a big retreat against the major currencies, giving up what it has gained in the previous month when it became obvious the legislation would pass.

 

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The gold price is on track today to rack up its 8th straight day of gains as optimism for US president Donald Trump’s tax plan fades into the background amid fears it will benefit the wealthy at the expense of the ordinary citizen.

With just hours or day’s remaining before Trump signs into law the biggest tax changes of a Generation, gold is shrugging off earlier predictions that investors would pile into the US dollar at the expense of other assets.

Although the changes are certain to be endorsed and signed by Trump, public sentiment surrounding the plan is less than enthusiastic and the Presidents republican party face losing

their majority in the senate next year as a protest the changes.

With the tax bill now out in the open, gold has fewer surprises and the uptrend that began almost 2 weeks ago has no reason to stop although there may be some resistance at current levels which was a previous support.

“The tax reform passing, you’d expect the market to celebrate that,” said Kevin Caron, a senior portfolio manager at Washington Crossing Advisors,

“But in reality a lot of this has already been part of the drama over the last year or so in anticipation of this moment. The market has gotten what it has already been discounting in.” he added.

 

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The Australian dollar has remained above the US70c mark in today’s trading session which caps off a pretty successful week against its US counterpart, seemingly unfazed by the prospect of Donald Trump’s tax reforms and expectations of higher rates in the US

In the biggest tax changes in a generation, Trump, along with his republican party has introduced sweeping changes to the US tax system to make it one of the most competitive in the world which includes slashing the corporate tax rate to 20 percent as well as substantial personal income tax cuts

The legislation in theory should lead to the repatriation of billions of dollars back to the US by companies who had previously sheltered their money off shore to avoid paying higher taxes.

The changes are expected to create a huge demand for US dollar’s and provide support for the currency

The world’s largest economy is also expected to hike interest rates next year which will put the yield well above Countries such as the UK, Canada and Australia which should generate further interest in the Greenback

So after all this why is the Australian dollar refusing to budge, and instead powering ahead against the US dollar when it has all of these headwinds to face?

We have to remember that the main driver of the Aussie dollar for more the best part of 15 years has been commodity prices and in particular Iron ore which is Australia’s biggest export.

It has rallied over 25% percent during the last 6 weeks to around $70 at the time of writing this article and with demand from China set to increase as we enter the New Year, further gains are expected.

So traders of the Australian dollar could do them self a favor by not paying to much attention to outside factor when trading the Aussie dollar but to keep an eye on commodity prices.

 

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The gold price jumped to a 3-week high in early trading today, taking its gains to over $40 in less than 2 weeks and with the market expected to remain quiet until after the new year, gold rise should remain intact.

So the question is what is in store for gold as the New year kicks off and what factors are likely to support or sink the precious metal?

The first thing that needs to be taken into consideration is the amount of rate hikes to be delivered by the US Federal Reserve with most analysts predicting that the Fed will move 3 times as the year unfolds.

In their last meeting, Fed president Janet Yellen noted that any future rate hikes would be data dependent which basically means, poor data, no rate hikes.

Last Friday we saw core personal consumption index figures and durable good figures from the US which both hit the market below expectations and if this trend continues as the New Year kicks off, rate hikes will be definitely put on the back burner for the time being.

The second thing which comes to mind is the standoff between North Kora and the US over the Former's nuclear weapons program which was exasperated recently by China's decision to halt exports of oil to North Korea which will further cripple the nations already devastated economy.

How the North's Kim Jong Un will react to this situation remains unclear but one thing is for sure is that is he is not going to back down from his nuclear weapons program and the unpredictability of US Donald Trump's reaction may see gold supported by investors looking for a safe haven.

Lastly we have the uncertainty surrounding Brexit and although negotiations for the UK to leave the European union have reached the second stage, there are so many things that could derail the process which threatens to bring instability to the European continent and once again boost the appeal of gold.

So as the situation stand now, gold may be a good bet as we enter the New Year until many of the unknowns become clear.

 

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The oil price is once again heading for the $60 mark in today’s trading session after yesterday’s attempt which add to a rally of around 8 percent over the last 2 weeks and some predict that there are further gains in store.

A explosion in one of Libya’s biggest oil pipelines on Tuesday which is under the control of the Waha Oil Company terminal has currently reduced oil supplies to the market by 70,000 to 100,000 barrels a day and will not be repaired until after the New Year.

“The net global impact of the (Libyan) pipeline explosion is relatively small and we will not blow out of proportion the impact of the incident on the supply and demand picture,” said Olivier Jakob from Swiss-based Petromatrix.

This is likely to be the catalyst for further support of the oil price but some analysts believe that the rise in oil price towards the end of the year has become a familiar site in recent times and the price only ends up reversing as the New Year gets under way.

“This could now be the fourth year in a row when the period around the turn of the year offers a good opportunity to start fading the market,” noted analysts from JBC Energy.

“We would have to argue that sometime over the course of January we will see a major turnaround.” they added.

Another factor which may hit the oil price in the coming years are the U.S. drillers who are planning to ramp up production of oil to take advantage of the higher prices which was evident this year from West Texas’s Permian Basin which produced a record 815 million barrels of oil in 2017.


"The magnitude of the rebound in Permian Basin liquids production is unprecedented," noted analyst Reed Olmstead.

"Not so long ago, many in the industry were saying the Permian was dead. “he added.

 

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The Australian dollar has once again racked up another day of gains as commodity prices keep surging ahead but this time it’s not the rise in iron ore prices that are driving the Aussie dollar’s gains but the country’s second biggest commodity export, copper.

Copper has now risen to nearly a four-year high at around $7,300 per ton and proves that the Australian economy is not reliant on one commodity alone.

This follows a stellar year for Australia’s employment market with the unemployment rate falling and the number of jobs created rising on a monthly basis.

All of these factors have set the Australian dollar up for further gains as we enter the New Year and especially since expectations are growing that the Reserve Bank of Australia will have to hike interest rates next year as inflations hit’s their target rate.

This factor may also quash predictions that rates in Australia will fall below those of the US which has been a burden on the Australian dollar for most of the year.

"With the Australian economy improving and commodity prices, especially copper for Australia, increasing, the Aussie is set to rise next year," said Masafumi Yamamoto, chief currency strategist at Mizuho Securities Co. in Tokyo.

"Inflation is also rising, and I expect the central bank will raise rates later next year. Those expectations are underpinning the currency."

Tomorrows release of New home sales numbers and private credit figures is expected to show the local real estate sector is in good shape which should further boost the Aussie dollar and see it finish the year on a strong note.