FiboGroup Market Analysis 2018

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With all the uncertainty surrounding the UK at the moment such as political instability as well as the current Brexit negotiations that seem to be dragging on forever, many are starting to wonder just how is the British pound holding up in the face of such problems.

A challenge to British Prime Minister Theresa Mays leadership is possible over the next 2 weeks as her own party revolt over her handling of Brexit which the Pound sterling has seemed to have brushed off but the next big round of news may be just too much for the British currency to handle.

The news is the growing expectations that the Bank of England will raise interest rates next month which is currently factored into the pound and may be the reason it has managed to remain above $1.30.

One analyst believes that the market has got it all wrong and with all the factors mentioned above as well as many others, the BOE will have no choice but to leave rates on hold out of fear of derailing the economy even further and the first rate hike may not come until 2020.

If the central bank does leave rates on hold next month the pound sterling is bound to take a big hit.

"The market thinks the Bank of England will hike once this year and once next year. We think that is wrong. In this uncertain environment with potentially a fall in the government, we don't think the Bank of England can hike rates." Said Alberto Gallo, a portfolio manager at Algebris Investments

"We think the Bank of England could go on hold rather like the European Central Bank has done, rather than continuing to hike one or two times over the next two years," he says. He added.

The short term focus for the pound will be a speech later today by Bank of England Governor Mark Carney where he will lay out the case for monetary policy moving forward.

 

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Any bounce in the Australian dollar like the one we have seen over the last few days might be a good time to sell the currency as the US introduces more tariffs against China which will Dwarf the ones that are already in place.


The Trump administration has now decided to introduce a new round of tariffs against Chinese goods worth 200 billion dollars which is much larger than the tariffs already in place and Beijing has vowed to retaliate which now sets the trade war in full swing.


The news is devastating news for the Chinese economy and in turn for the Australian dollar as China is Australia’s largest trading partner and there are fears the tariffs will create significant price rises in a range of goods which will see less imports into Australia and the Aussie dollar is likely to feel the pain.


The currency took a big fall last time around when the first round of tariffs were introduced so when it becomes clear that Trump will stick to his guns about the latest tariffs and refuse to cancel them, the Australian dollar may see some serious losses.


Two of Australia’s biggest commodities, namely Iron ore and copper will also feel the effects as any disruption to global trade which the tariffs are likely to cause has an immense effect on commodity prices.


"Trade disputes between the US and world have caused immense uncertainty in recent months. We do agree with this apprehension that a 1 percentage point decline in global trade has historically reduced copper prices by around 4 percentage points," said analysts from Bank of America Merrill Lynch's global commodity research team.


"These numbers may sound small, but putting them into context, if global trade growth fell from April's 4.4 percent year-on-year to the 2015/16 average of 1.7 per cent, copper prices could correct by 10.8 per cent year-on-year to $5,100 a tonne." They added.

 

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Higher inflation in the US usually translates to rising interest rates which is usually negative for gold, as higher rates mean bigger yields which tends to leave investors chasing the US dollar for bigger returns.

Data out yesterday showed that U.S. consumer prices jumped to their highest level in nearly 6.5 years, rising to 2.9 percent which was slightly up from 2.8 percent in the previous month.

This is bound to keep the US Federal Reserve on track to lift interest rates further so the inflations figures remain under control.

The US economy has not had to deal with rising inflation for more than 10 years and the last time around it caused havoc to the American financial system so investors are poised to be weary this time around and put their money into safe haven assets such as gold in order not to get burnt again.

“Interest rates are going to move higher but real rates will remain low and I think gold will do just fine in that environment,” he said. “I still like gold as an important diversifier as inflation moves higher.” Said Axel Merk, president and chief investment officer of Merk Investments.

The trade tariffs recently introduced by US president Donald Trump are also expected to lend some support to the gold price as investors, wary of the unknown one again seek out safer places for their money and gold is expected to be near the top of the list.

“Although tariffs aren’t good, I don’t see signs that this economy is going to tip into a recession any time soon. I think this economy is going to overheat,” he said. “An important issue though is that people don’t know what is going to happen and they don’t know how to invest in the long-term.” Mr Merk added.

 

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Along with the Swiss Franc, the Japanese Yen has historically been the other currency that the market has deemed a safe haven in times of financial instability but there may be a new currency on the block which investors feel more safe with.

Ever since the trade wars between the US and China came to the forefront, the Yen has been declining against its US counterpart and even the uncertainties surrounding Brexit, and the damage it could do.

The reasons behind traders shunning the Yen could be many but one of the reasons may be the lack of yield that the currency offers as interest rates in Japan currently sit in negative territory at -0.1 percent where they have been since 2016.

In fact, the Japanese currency has not provided investors with any yields for more than 25 years.

So, which currency is benefiting at the expense of the Yen? Of course, it’s the US dollar.

Although the Greenback has also been traditionally noted as a stable currency, it wasn’t in the same league as the Yen when it came to safe havens.

But now it seems the tide is changing and investors are no longer just happy to park their money and ride out the storm in times of trouble and now they are looking for a mix of safety and growth which the US dollar seems to be offering at the moment.

Of all the major economies, the US currently has the highest interest rates which means bigger returns and with rates set to push higher as the year unfolds the situation is bound to get better.

“Investors have been piling in on the dollar because of higher interest rates in the US and expectations that monetary conditions will tighten further in the coming months,” said Fawad Razaqzada from Forex.com.

“With U.S. employment already near its potential, unemployment low and wages on the rise, inflation could accelerate in the coming months due to the increase in the price of goods and services as a result of the import tariffs. This may further boost expectations over rising price levels and in turn tightening of monetary policy from the Fed, which already looks set to hike interest rates two more times in 2018,” he added.

 

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The British pound has hit its lowest level in almost a year after a round of disappointing numbers all but killed the chances for a rate hike from the Bank of England next month.

CPI figures released earlier today came in at 2.4 percent against expectations for a figure of 2.6 percent, continuing its downtrend and relieving some of the pressure on the BOE to hike rates in August.

The Central bank has consistently mentioned 3 things that will help them decide to tighten monetary policy as the year unfolds which are higher inflation, a smooth transition of the Brexit process as well as higher wage growth figures.

Its seems at the moment that none of the above is going to plan with British Prime Minister Theresa May narrowly wining a vote yesterday in parliament to keep her Brexit process on track, but she is not out of the woods yet as another vote is due next week which may be defeated in the house of commons and throw the UK into a period of political instability.

Wage growth in the UK is also at the lower end of the scale and with oil price expected to fall as the year unfolds we may not see any rate hike at all from the BOE this year which will hit the pound hard as at least one hike is priced into the currency.

"If we are right in thinking that oil prices will fall back later this year, then input price inflation is unlikely to remain this high for long. And CPI inflation looks set to resume its downwards later this year, as the inflationary impact of sterling’s fall continues to fade. On the face of it, then, the figures perhaps reduce the chances of a rate hike in August," says Ruth Gregory, a senior UK economist at Capital Economics.

 

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The Australian dollar is under further pressure today after yesterdays dovish statement from the RBA and a bullish statement from the Head of the US Federal Reserve.

In their statement yesterday, the RBA noted that the trade war that is brewing at the moment between the US and China has the potential to cause substantial damage to the global economy and countries such as Australia will feel the brunt of the hit because of its close connection from China.

The Central bank already had reservations about the state of the Australian economy before the trade wars started so this situation has only exacerbated the problem and most likely caused further delays in lifting interest rates

"The minutes of the Reserve Bank of Australia's July meeting confirm that the bank is a long way from raising interest rates and that it is worrying more about a global trade war, the slowdown in China and the high level of domestic debt at home," said Paul Dales of Capital Economics

"If anything, July's minutes support other evidence that the RBA is becoming a bit more concerned about the outlook." He added.

Ather factors which hit the Aussie dollar was the release of industrial production figures yesterday from the US, that came in at 0.6 percent and was a sharp rebound from the previous months figure of -0.5 percent and shows that business confidence is powering ahead.

This thought, along with a strong jobs market as well as inflation numbers was backed up yesterday in a speech by US Federal Reserve Chair Jerome Powell who noted that the US economy is in great shape and the only way forward is higher interest rates.


“With appropriate monetary policy, the job market will remain strong and inflation will stay near 2% over the next several years,” Powell told the US Senate Banking Committee.

“With a strong job market, inflation close to our objective, and the risks to the outlook roughly balanced, the FOMC believes that for now the best way forward is to keep gradually raising the federal funds rate.” He added.

 

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It seems as if the crypto currency phenomenon has come around again with the likes of bitcoin and such with the former jumping more than 15 percent in less than a week and some say this may be the start of something more as the big money starts to get involved in the crypto currency business.

A report out by Forbes mentioned that Cohen Private Ventures, a billionaire investor fund which was launched by the Cohen’s family office in 2010, has invested in Autonomous Partners, a new hedge fund that is acquiring cryptocurrencies.

This may be just what the market needed to add some legitimacy to the crypto currencies as many people are still skeptical about the value of such investments for fear of losing all their money

“It definitely is causing some excitement,” said Mati Greenspan, senior market analyst at eToro,

“The idea of big financial firms moving into crypto certainly isn’t new, and this is a trend we’ve been noticing gaining strength since November.”

One of the other major reasons that investors have avoided bitcoin are the wild swings the currency tends to make and with such volatility investors prefer to sit on the sidelines.After reaching a high of around $20,000 the price tumbled to $6,000 and has now made somewhat of a recovery to more than $7000 and the trend is looking positive.

The price “is down nearly 53.07%. However, I do think that the tide is about to turn for bitcoin and it won’t be long before we see a major move,” said Naeem Aslam, chief market analyst at Think Markets U.K.

“The evidence is in the hash rate which is consistently increasing, meaning, that miners are still very busy, and they hold the view that the price is going to rise,” he added.

 

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The US dollar is taking a breather in today’s trading session after yesterdays solid gains on the back of a speech to congress by US Federal Reserve President Jeremy Powell who noted the market should get ready for interest rate hikes as the year unfolds.

The Fed chairman brushed off concerns over the ongoing trade war between the US and China and said the US economy was in great shape with the jobs market reaching near full employment and inflation sitting near the Fed’s target rate.

"Earlier in the expansion, as the economy recovered, the need for highly accommodative monetary policy was clear," noted Mr Powell

"But with unemployment low and expected to decline further, inflation close to our objective, and the risks to the outlook roughly balanced, the case for continued gradual increases in the federal funds rate is strong." He added.

The market is currently predicting 2 more rate hikes from the Fed this year but some are not discounting a 3rd move and as more investors begin to believe this scenario the US dollar is only going to go from strength to strength.

"For now, the market is of the view that the Fed is not overly concerned with the impact that a trade war could have," said Omer Esiner, chief market analyst at Commonwealth Foreign Exchange in Washington.

"The comments from the Fed have put the focus on the divergent policy outlook between the Fed and other central banks. We're seeing that play out with the stronger dollar," he added.

 

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The British pound has stabilized today after tanking in yesterday’s trading session on the back of disappointing data that may have ended any chances of the Bank of England raising interest rates next week.

Retail sales figures from the UK hit the market at 3 percent, which was well short of analysts’ expectations for a figure of 3.7 percent and significantly lower from last month’s figure of 4.5 percent.

Analysts cited many reasons for the disappointing figures such as the football and the unusually hot weather which may have deterred people from shopping.

“The World Cup and heatwave could conceivably have kept people out of the shops, but equally they could have contributed to a feel-good factor on the high street” said Jacob Deppe, head of trading at Infinox

“The pound dived faster than Neymar on June’s weak retail number. It crashed through the $1.30 floor to hit its lowest level against the Dollar for 10 months.” He added.

Up until a week ago, a majority of investors were betting on a rate hike from the BOE next week but the chances started to fall after the release of disappointing inflation figures.

This coupled with the retail sales numbers as well as the many uncertainties surrounding Brexit have now put the chances of a rate hike at less than 50 percent and if the BOE does in fact keep rates on hold the Pound is likely to see much bigger losses.

“That was a terrible set of retail sales figures which will do nothing to persuade the Bank of England to hike in August” said Neil Wilson, the chief market analyst for Markets.com

Combined with the disappointing CPI reading it suggests the MPC would be well advised to row back on plans to raise rates, a fact that seems to have been reflected by traders’ bets on sterling this morning.” he added.

 

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The British pound has now had its worse run since the global financial crisis and according to some analysts the pain may be far from over.

The currency has now fallen for the last 11 trading sessions as the chances of a no deal Brexit grow which would see the UK crash out of the European Union, which would throw the country into financial turmoil.

The market is now pricing in a 50-50 chance on a deal being reached over Brexit and they see the sticking point being the British Parliament, which has the final say on any negotiations. If the government does reject any deal the British pound hit levels lower than it reached immediately after the Brexit vote.

“The risk of Parliament rejecting any deal put in front of them late in 2018, or early in 2019, is increasing,” said John Wraith, head of U.K. macro rates strategy at UBS Group AG.

“This puts both the agreement on future relationships and the transition period after the end of March 2019 in serious jeopardy. If the prospect of no deal gains momentum, there’s bound to be bigger moves ahead.” He added.

It’s not just Brexit that is affecting the pound at the moment. External political factors are also playing their part such as the crisis in Turkey which currently has a riff with the US over the jailing of a US pastor which has led the introduction of sanctions by the US and caused the Turkish Lira to plummet.

"The pound seems to be unraveling against the US dollar due to a confluence of factors," said ING currency strategist Viraj Patel.

"While there's the obvious Brexit story, the recent move lower has been a global move. Broad emerging market turmoil is spilling over into a strong US dollar, especially against European currencies." He added.