Market Review: BOJ & SNB INTEREST RATE DECISION
Economic calendar (highest volatility): 17th September – 21st September 2018:
This month, the United States (U.S) Federal Open Market Committee (FOMC) raised Interest Rates largely as anticipated, bringing up the benchmark rate to 2% from the former 1.75% level. Interestingly while this decision largely met forecast, the tone of the regulators suggest that two more U.S Interest Rate hikes are likely to take place this year. This brought about sustenance in the U.S Dollar's (USD) value and avoidance of a 'sell on fact' currency play, as the formerly vague expectations for four Interest Rate hikes to take place this year has now been largely reaffirmed. The USD fell on a Friday-to- Friday basis to close at 94.95 pressured by the dip in the U.S. inflation on Thursday. The U.S. consumer price index slid in August, causing pressure on the Federal Reserve to tighten borrowing costs. This weighed on the U.S. dollar. Investor concerns about a possible escalation of the U.S.-Chinese trade conflict held gains in check. In the latest chapter of the U.S.-China trade dispute, China is asking the World Trade Organization for permission to impose US$7 billion a year in sanctions on the U.S. in retaliation for Washington’s non-compliance with a ruling in a dispute over U.S. dumping duties. China will formally place the request next week in response to Trump’s warning last Friday that he was ready to impose an additional $467 billion in tariffs on Chinese goods. Furthermore, the day after financial markets around the world cheered the apparent good news that the U.S. was seeking a new round of trade talks with China in a fresh bid to avert a trade war, President Donald Trump undermined that very idea by tweeting, “We are under no pressure to make a deal with China, they are under pressure to make a deal with us.” Besides China, Trump is reportedly set to involve Japan in his trade war after the Trump administration pushed Japan to further open its automobile and agriculture markets as part of efforts to reduce the chronic U.S. trade deficit which drew measured reactions from a Japan. The team here at FintechFX view that this could be a hindrance to the USD's strength moving forward.
Furthermore, the team here at FintechFX view that political risk related issues might deter the rise of the USD as concerns for more aggressive retaliations out of China built in to the currency market, even though the USD was higher than most major pairs this week as the market saw that the U.S. would be better equipped to weather a slowdown in trade than other major economies. Worries of escalating trade wars with neighboring countries like Canada could be a longer-term negative for the USD as currency markets in general, do not favor any forms of trade intervention. Negotiations between the U.S. and Canada are still underway as the two parties seek to come to an agreement on the future of the NAFTA. The talks are expected to continue and could potentially last for weeks. Trade wars carry a major risk of escalation that could weaken investment, unsettle financial market and slow global economy.
In regards to this week, the Canadian Dollar (CAD) and Great Britain Pound (GBP) will probably be one of the most-watched currencies, ahead of the release of Canada’s inflation rate and on worries over the possibility of the U.K. having to leave EU without securing a trade agreement. The GBP is expected to continue to see high volatility as it remains sensitive to Brexit developments. The team here at FintechFX also view New Zealand’s Gross Domestic Product numbers for the second quarter will be watched closely on Wednesday as incoming data continue to point to weakness in the economy. The country’s GDP is forecast to have expanded by 0.8% quarter-on-quarter in the three months to June, improving from the prior quarter’s 0.5% rate, though a lower-than-expected reading could bring the Reserve Bank of New Zealand closer to a rate cut and weaken the New Zealand dollar. In regards to safe haven currencies, both the Bank of Japan (BoJ) and Swiss National Bank (SNB) will be outlining their stance on their country's Interest Rate this week.
Taking a slight recap on the USD/CAD, the team here at FintechFX would like to highlight that the Bank of Canada (BoC) has raised its benchmark interest rates from 1.25% to 1.50% in July, bringing them closer to the benchmark rate of their neighbor, the U.S. The BoC also intends to raise rates in October, assuming a successful NAFTA deal is struck. Nonetheless, the team notes that a 'sell on fact' play was witnessed straight after reinforcing our views that the USD strength largely outweighs. In addition as of late, the CAD has largely been affected by the progress of the NAFTA negotiations with the U.S. With the possibility that talks between the US and Canada to update NAFTA could go on until October 1, which is the deadline for submitting an agreement to the U.S. Congress, traders will have the Canadian Consumer Price Index (CPI) and retail sales figures release on Friday to bring about substantial market volatility to the CAD during the week as any spike in inflation that would trigger an acceleration of the pace of interest rate hikes by the BoC. While annual inflation surged to 3% in July, a further increase in August would strengthen the possibility of the BoC raising interest rates at its October policy meeting, thus helping the CAD advance . Therefore for the week, the team here at FintechFX view the USD/CAD to rise further.
The GBP/USD has recouped much of its post-Brexit losses in the recent weeks following the improved progress in Brexit negotiations, after being under pressure over the last few months for fear of a no-deal Brexit. Following a statement by European Union chief negotiator Michel Barnier that the EU would offer the U.K an unprecedented third-country deal, in the latest development, it was reported on Monday that Barnier had told a forum in Slovenia that it was realistic to expect a Brexit deal in early November. While Barnier’s comments have been seized on by markets this week as a signal that Britain could avoid a disorderly no-deal Brexit, division within Theresa May’s government over Brexit continue to rattle markets. The team here at FintechFX views for a "buy on rumour" move to continue to develop pending the Brexit developments as the team is in the opinion that the GBP will rise under all Brexit scenarios so long as a no-deal outcome can be avoided. Upbeat economic data has also contributed to the bullish GBP momentum, although next week’s indicators may not be as positive and could fail to provide support for the GBP in case the Brexit negotiations were to break down. The U.K. CPI figures will be watched on Wednesday for evidence that inflationary pressures in the U.K. continue to edge lower towards the Bank of England’s 2% target. The CPI is expected to is expected to lower to 2.4% in August, from 2.5% in July; while the core rate is predicted to fall to 1.8% from 1.9% previously. Retail sales numbers will follow on Thursday and are expected to show a 0.2% month-on-month contraction in sales in August after a 0.7% bounce in July.
Source (Charts): https://www.investing.com
Source (Economic Calendar): https://www.forexfactory.com/calendar.php
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