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Fundamental Analysis 19.04.2018 – Market Outlook

Market Recap

AUD continued to gain. Aluminum and nickel jumped as the market worried about the impact of US sanctions against United Company Rusal, a major Russian exporter. Australia is seen as benefiting from the sanctions as it’s an alternative source of these metals. As the graph shows, the correlation between AUD/USD and base metals prices is long-standing and close. 

Also, iron ore soared 5.3% after BHP Billiton lowered its annual output target because of some technical issues with equipment. That may have helped AUD as well.

On the other hand, GBP fell after UK inflation missed estimates. Consumer Price Index (CPI) growth slowed to 2.5% yoy from 2.7% (it was expected to remain at 2.7%) while core CPI slowed to 2.3% yoy from 2.4%. Coming after Tuesday’s 17th of April 2018 slower-than-expected rise in average earnings, the figure cemented the view that the Bank of England is likely to hike rates only once this year. Politics is also conspiring against GBP after the House of Lords defeated the government in a key Brexit vote by insisting that ministers negotiate a new customs union with the EU, something that Prime Minister Theresa May has refused to do. They also went against the government by voting to limit the government’s ability to unilaterally change employment, consumers and environmental rules after Brexit. Having hit a post-Brexit high recently on optimism about Brexit and a focus on monetary policy --- maybe the path isn’t going to be a smooth as some in the market had thought. This could be negative for GBP.

CAD also came under pressure as the market interpreted the Bank of Canada’s (BOC) statement and BoC Governor Stephen Poloz’ comments to be more dovish than expected. Comments like “escalating geopolitical and trade conflicts risk undermining the global expansion” and mention of “upward revisions to estimates of potential output growth” made people think that the BoC wasn’t likely to hike as much as had previously been expected. The probability of three hikes this year diminished and two increased (slightly). 

Today’s market

UK retail sales come in two sizes:  with and without gasoline (petrol). Both are expected to be lower this month. In fact, the figure including gasoline is expected to be low, down again for the third month out of four, partly because of bad weather. The yoy rate is expected to accelerate slightly, but still remain far below what it was a year ago. Sluggish retail sales in Britain probably reflects the continued pressure on household incomes as real pay gets squeezed. As you may have noticed this week, the 2.8% yoy rise in pay is only slightly higher than the 2.5% yoy rise in consumer prices, meaning that real incomes are hardly rising at all. Combined with tightening on consumer credit, this is starting to have a negative effect on consumption. This could be negative for GBP. 

There are three Federal Reserve System (Fed) speakers today.

Federal Reserve System (Fed) Governor Lael Brainard will speak on regulatory reform at the 2018 Global Finance Forum in Washington. Brainard recently raised the idea of using the countercyclical capital buffer (CCyB), a new, as-yet unused policy tool in the Fed’s toolbox, to restrain bank lending. If the Fed did decide to do so, it would mean less need to raise interest rates to tighten financial conditions. That would be negative for the dollar. Fed Governor Randal Quarles, Vice Chairman for Banking Supervision, doesn’t seem to have mentioned the idea.

Fed Governor Randal Quarles speaks again, his third speech in a row.

Cleveland Fed President Loretta Mester will discuss the outlook for the economy and policy. She’s on the hawkish side, but her most recent statement could have been made by almost any Federal Open Market Committee (FOMC) member. She said at the end of March 2018 that “If the economy evolves as I anticipate, I believe further gradual increases in interest rates will be appropriate this year and next year.” One thing to watch out for:  her research department recently put out a report on the countercyclical capital buffer that Governor Brainard has been talking about.

The Philadelphia Fed index is expected to be slightly lower but still at a level signifying substantial expansion. It’s expected to fall to 21.0 from 22.3, but considering that the average over the last 20 years has been 6.83, that still indicates a healthy economy. By comparison, Monday’s 16th of April 2018 Empire State index missed expectations, falling to 15.8 from 22.5 (18.4 expected). If today’s Philadelphia Fed index comes in as expected and falls only modestly, that could be positive for USD.

Overnight we get Japan’s national Consumer Price Index CPI. This month the headline rate of inflation is expected to slow notably, in line with the Tokyo headline CPI, but the core measure is forecast to remain at the same yoy rate of increase. No change in core inflation, no change in policy. This could be neutral for JPY.

The Fundamental Analysis is provided by Marshall Gittler who is an external service provider of Claws and Horns (Cyprus) Limited, an independent analytical company. Any views and opinions expressed are explicitly those of the writer. Any information contained in the article, is believed to be reliable, and has not been verified by STO and is not guaranteed to be accurate. References to specific products, are for illustrative purposes only and are not a form of solicitation, recommendation or investment advice. Past performance is not a guarantee of future performance.

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