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Weekly Digest - RBA decision could impact the value of AUD and this could be the week the U.K. enters recession

Monday, September 30, 2019 12:05 PM GMT

 In a relatively quiet week for economic calendar events and published data, it was political theatre and macro economics which dominated the news agenda, causing associated movements in financial markets. In the USA the value of USD and equity market sentiment, was impacted by issues surrounding Donald Trump’s potential impeachment and the ongoing issue of Chinese trade relations. The value of GBP whipsawed in a wide range during the week, after the U.K. Supreme Court declared the shutting down of Parliament by the prime minister to be unlawful, while the ongoing complications of Brexit also continued to affect the U.K. pound’s value.

 The overarching political position of the President overshadowed the publication of economic data in the USA. Falling consumer confidence, mortgage applications falling by -10.1%, pending home sales falling to 1.1%, static unemployment claims and annualised GDP stagnation at 2.0%, had little impact. Meanwhile, the FOMC cutting the interest rate during the previous week to an upper bound level of 2%, hasn’t had the desired impact the USA administration anticipated.

 Donald Trump placed increasing pressure on both Jerome Powell and the FOMC to cut interest rates, in an effort to induce a monetary stimulus by lowering the value of USD. Despite the FOMC obliging to this pressure, USD has risen sharply versus: JPY, EUR and GBP since the decision. Major currency pairs experienced some of the widest trading ranges and changes during the week; EUR/USD ended the trading week down -0.72%, GBP/USD down -1.51% and USD/JPY up 0.34%. A quick glance over at the ZuluTrade TradeWall will reveal the Traders who are potentially matching their decisions to changing events. A visit to the Social Charts section on the ZuluTrade site provides the opportunity to witness Traders and Investors discussing their trading ideas.

 Trump has gone on record stating his desire to see U.S. interest rates cut to zero to match the Eurozone. https://edition.cnn.com/ This ignores the fact that in an economy which is approximately 80% dependent on consumerism driven by imports, such a cut could have a devastating impact on the USA economy, causing a sharp rise in the cost of imports. Inflation would eventually rise, which is then controlled by raising interest rates.

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 The U.K. experienced a breathtaking week of political events. The Labour Party, the main opposition to the governing Tories, held their annual conference from Monday to Wednesday during which policy is democratically decided. Labour decided that in any upcoming election they’d campaign for a confirmatory referendum on Brexit, but wouldn’t declare whether they were for remain or leave during any impending campaign. The apparent schism of opinion in Labour caused by the decision, was overshadowed by news on Tuesday that the Tory government’s action to prorogue Parliament, was declared unlawful by the highest court in the U.K.

 The decision, which was (surprisingly) a unanimous decision by all eleven judges, came with  a damning indictment of the U.K. prime minister’s motives attached. The announcement caused the value of GBP to immediately spike in value versus its main currency peers. Traders and investors should continue to carefully monitor the ongoing issue of Brexit in the U.K. Any defeat for the the current government generally results in a rise in value of GBP. Analysts and traders immediately translate any defeat as bullish for the U.K. pound, on the basis that a no deal Brexit, or any Brexit becomes less likely.

 The interactive ZuluTrade economic calendar can prove to be an extremely valuable tool for determining any upcoming events which could alter the value of GBP, as the Brexit clock counts down to October 31st. However, it’s essential that market participants pay close attention to the fluid nature of any breaking news and developments relevant to the U.K. position. These developments are tricky to diarise and predict, for example, the prime minister is likely to consider breaking the law by not honouring Parliament‘s instructions to ask for an extension, if no withdrawal agreement is passed by October 19th. He’s also likely to face a vote of no confidence at any time. These potential events could have a significant impact on the value of GBP. Traders and Investors should ensure they remain tuned into any broadcasts. It might be worth considering subscribing to news publications such as Bloomberg  or perhaps taking advantage of any squawk services, which can provide immediate alerts to any sudden developments; https://ransquawk.com

 Gold is often referred to as a “safe haven” asset. The theory suggests that when market risk is off gold rises, as speculators look towards safe havens to park their wealth. This phenomenon becomes tested during times of turbulence. Safe haven currencies also come into play during risk off periods and investors tend to choose yen and the U.S. dollar. USD is considered a safe haven due to it being the globe’s reserve currency. As one of the oldest mechanisms of exchange in Asia, investors will often take refuge in JPY.

 Gold had experienced losses over recent weeks as overall turbulence has increased in: forex, commodity and equity markets. An interesting phenomenon has taken place over the past year; despite equity markets rising to record highs in the USA, XAU/USD (gold) has risen by circa 26% year on year, defying the traditional risk-off theory relating to the performance of gold.


 

Precious metals are often used as a hedge versus equities and forex positions. The overall skittishness of gold as it’s whipsawed in a wide range during the month of September, could be an indication of various issues relating to overall sentiment. Investors could be hedging their bets against equity market falls and using gold as a save haven. What is curious to note is gold rising by circa 26% over the past twelve months, taking the price measured in USD to levels not witnessed since February 2013, while the main equity markets in the USA have also reached record highs over recent months. This interesting diversion from normal risk-on, risk-off behaviour is framed well on the weekly time frame, on which significant gains since May are illustrated.

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Scheduled economic calendar events for the week and their potential impact on currencies

 AUD

 

This week is a busy week for economic calendar events concerning all major currencies including the Australian dollar. The RBA, Reserve Bank of Australia, will reveals its interest rate decision. Reuters are predicting a cut in the cash rate from 1.00% to 0.75%. This decision will be broadcast at 5:30am on Tuesday October 1st. Such a cut could cause increase speculation in the Aussie dollar, depending on how priced-in the forecast is. Announcements during times of low liquidity before European money markets open, can also cause spikes and whipsaws. Traders and Investors would be advised to adjust their trading objectives in anticipation of the event.

 USD

 The first Friday of each month corresponds with the publication of the latest NFP jobs numbers for the previous month. The prediction is that approximately 145k jobs were created in September. Although it’s listed as a high impact calendar event, over recent years NFP data hasn’t moved the needle much, in relation to the value of USD in comparison to previous times, such as during the Great Recession. The unemployment rate and wage rise metrics are also published around the same time of day, allowing analysts and forex brokers to derive an overall impression and opinion of the current state of the country’s employment/unemployment situation.

 This week, on Thursday October 4th at 15:00pm U.K. time, the ISM data on non manufacturing in the USA is published, it’s expected to show a fall to 55 in September from 56 in August. The reduced reading could be enhanced by factory orders falling by -0.5% in August. Due to trade tensions with China being back on the radar, any contraction in manufacturing and the service economy could prove to be bearish for USD. Chinese PMI manufacturing data published on Monday September 30th, could deliver a leading indication of the overall health of Chinese manufacturing. Similarly, the various Japanese Tankan surveys and data published on October 1st during the early stage of the Asian trading session, could affect the value of USD/JPY and other yen pairs. USD/CAD will come under scrutiny on the same day when the latest, annual, Canadian GDP figure is broadcast at 13:30pm U.K. time, a fall to 1.4% from 1.5% is anticipated.

 GBP

 The latest and final GDP figures for Q2 in the U.K. will be published on Monday September 30th, on an annual basis Reuters forecast that the figure will come in at 1.2%. The actual quarter two metric is forecast to come in at -0.2%, a figure which could indicate that the U.K. is in a technical recession. Irrespective of other political issues, such a negative reading could impact on the value of GBP, analysts may deduce that the Brexit debacle has caused a contraction. Based on their recent comments, the Bank Of England could be more inclined to reduce the base interest rate during the remainder of 2019, in an attempt to ward off a deep recession.

 The U.K. current account balance is forecast to reveal a significant improvement; from -£30b to -£19b in Q2. On Tuesday October 1st at 9:30am the U.K. Market manufacturing PMI is forecast to confirm that the sector is in recession with a 47 reading for September, 50 separates contraction from expansion. On October 3rd at 9:30am the September construction Markit/CIPS PMI is forecast to remain mired in negative, recessionary territory at 45 when the reading is revealed. On Thursday the critical services reading for the U.K. is predicted to come in at 50.3 for September, just above the critical 50 separation level.

 EUR

 Germany’s annual retail sales are forecast to show a sharp drop from 4.4% to 2.9% up to August when the data is printed on Monday 30th at 7:00am, August is predicted to show a significant improvement; from -2.2% to 0.5%. Eurozone Unemployment is expected to remain static at 7.5%. Unemployment for Germany is forecast to remain at 5%. German CPI is expected to come in at 1.3% in the afternoon. Various PMIs relating to the Eurozone are published on the 1st. And in the afternoon the latest CPI figure for the E.Z. is predicted to show a slight rise to 1.0% from 0.9%. A reading which could positively impact on the value of EUR if met.

 

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Disclaimer

The views expressed do not constitute investment or any other advice /recommendation /suggestion and are subject to change. Reliance upon information in this material is at the sole discretion of the reader. Opinions expressed in the report do not represent the opinion of ZuluTrade Social Trading Platform and do not constitute an offer or invitation to anyone to invest or trade.

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