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Weekly Digest - Quiet week - focus will remain in the USA and U.K.

Monday, October 7, 2019 1:51 PM GMT

The U.S. dollar, the U.K. pound and the Aussie dollar, were the currencies under increased focus and speculation during last week’s trading sessions. Central bank decision making, scheduled calendar events and developing political issues, were responsible for the movements in the major currency pairs throughout the week. 

USD experienced fluctuations in wide ranges versus its major peers, after the latest ISM manufacturing data created doubts that the current GDP growth trajectory for the USA economy will be maintained. Concerns have resurfaced that the China trade war, implemented by the USA administration using tariffs as a weapon, has backfired against the globe’s largest economy. Noise emerging from the Trump administration; that they’re considering extending further tariffs on European imports, hasn’t encouraged positive market sentiment. Political developments are also causing market nervousness across the spectrum of financial sectors, as momentum develops to begin impeachment proceedings against Donald Trump.  

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The ISM manufacturing reading came in at 47.8 for September, significantly below the 50 level separating contraction from expansion. The ISM employment reading came in at 46.3. The recent cut of the key interest rate to 2.0% by the FOMC, might not be sufficient to increase manufacturing performance, a sector that became the focus of Trump’s “make America great again” electioneering campaign back in 2016. USD fell versus its major peers during the week, falling by circa -0.92% versus yen and -0.35% versus the euro. The main equity indices in the USA experienced mixed fortunes; the NASDAQ 100 ended the week up 0.94% with the DJIA down -0.92%. Investors and Traders would be advised to monitor the political developments in the USA carefully over the coming days and weeks, as such a fluid situation could suddenly result in a dramatic decision, regarding the President’s position in office. 

As widely predicted by Bloomberg and Reuters, after they’d polled their panel of analysts, Australia’s central bank, the RBA, announced a cut in the key interest rate to a new record low of 0.75% (from 1.00%) on October 1st. During a speech in Melbourne five hours after the announcement, the Governor of the RBA, Mr.Lowe, explained the rationale behind the decision. As expected the Governor cited: concerns over growth, weakening inflation, stagnant employment and the desire to get ahead of the curve to prevent any impending contraction in manufacturing etc. as the reasons for the rate cut. And with the Markit manufacturing PMI falling to 49.3 in August and only rising back to 50.3 for September, the RBA had justification for their concerns. 

However, the real reason for the cut is probably hiding in plain sight; as an economy Australia is underpinned by consumer debt, particularly housing debt, any threat to that private debt growth will cause recessionary pressures to build. According to data released last week private sector credit is shrinking; both month on month and year on year. Meanwhile, building approvals are down -21.2% year on year. This lack of activity and confidence in the construction sector has continued after Australia’s house prices fell by a record amount (year on year) up to July. Australia’s house price downturn is now officially the largest on record. Median home prices have fallen -8.2% YoY, surpassing the previous record decline seen in the early 1980s. And at 20 months, the current downturn is one of the longest house price slumps on record. The investment bank UBS expects Australian house prices to eventually decline by -10% before stabilizing, most likely later this year. 

In last week’s weekly digest column we drew our readers’ attention to the RBA decision and mentioned that the reactions to high impact calendar events can be unpredictable, especially during times of low trading volume.  If an announcement is broadcast at the end of the Asian trading session, before the London-European session has opened, the FX markets can react violently due to the lack of trading volume. Traders and Investors should always remain aware of these gaps and adopt their trading methods and strategies accordingly. 

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As can be clearly seen when analysing the following two time-frames, the direction of AUD/USD followed the text book pattern we’d expect when the interest rate is lowered for the country relating to the currency; AUD slumped versus the majority of its main peers. However, Traders and Investors have to consider other criteria in order to position themselves to profit from any move. Not only do they have to be mindful of the spikes which can occur due to a sudden rise in volatility during an overall lack of trading volume, they have to consider widening, or removing their stops to cater for a wide trading range and perhaps set take profit limit orders.

GBP 

The ongoing saga of Brexit was mainly responsible for the moves in Sterling during the past week. The value of GBP versus its major peers rose and fell in direct correlation with news concerning the latest withdrawal offer the U.K. government put forward to the E.U. The official exit date of October 31st is approximately three weeks away and the signs are that the request for a revision to the Withdrawal Agreement, to remove what’s termed “the backstop”, will be refused by the E.U. Therefore, under the new Benn Act, the U.K. prime minister will have to approach to E.U. to request an extension. However, rumors were circulating that despite the recent unlawful prorogation of Parliament, the Tory party are prepared to test court opinion again, by refusing to honor the Act. This could cause a constitutional crisis involving the monarch and might lead to a vote of no confidence with a temporary Labour Party government installed, to organize a general election and second Brexit referendum.

 

Not only should Traders and Investors keep attuned to the ongoing and fast-moving political issues in the U.K. there’s a raft of economic data scheduled for publication this week, that could impact on the value of GBP. The ZuluTrade calendar section is here and can be tailored to perfectly match the currency pairs you trade or watch  The most recent U.K. Markit PMIs for: construction, manufacturing and services are all under the 50 level and as such the metrics are indicative of an economy in contraction. The U.K. ONS published a GDP figure of -0.2% for Q2 last week and when combined the weak PMI readings, the GDP figure confirmed many analysts’ opinions - that the U.K. is now in a technical recession. 

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Although the ONS only confirms a recession after two successive quarters of negative readings, other developed economies will certify recessions after 2-3 consecutive months of negative GDP data. Analysts will focus on this week’s latest U.K. GDP data, when the figures are published as part of a series of thirteen data points, at 9:30am on October 10th. The expectation is for the three months GDP up to August to come in at 0.1% growth, with August (in isolation) coming in at 0.0%. Other notable data releases for the U.K. on the same day includes the trade balance for August, which is forecast to come in at -£1050m, representing quite a collapse from the previous reading of -£219m, perhaps illustrative of the Brexit effect. 

USD 

The aforementioned potential for impeachment proceedings could overshadow any economic calendar events and data releases this week. The Trump administration may also look to create diversionary tactics, for example, by ratcheting up the tariff and trade war narrative, or exaggerating security threats, in order to deflect attention from any actions versus his office. 

The publication of the latest consumer credit report on October 7th at 8:00pm U.K. time could provide a shock, Reuters forecast a fall to $15b in August from $23.3b. This week we’ll also receive the minutes from the last FOMC meeting, explaining their justification for lowering the key interest rate to 2.0%. Printed on October 9th at 7:00pm U.K. time, the publication of the minutes has historically moved FX and USA equity markets in the past, if the minutes contain any indication that the committee has either hardened, or softened its monetary policy. The chair of the Fed, Jerome Powell, will also deliver speeches this week which could impact on the value of USD and equity markets. On October 10th the latest CPI data for the USA will be revealed, the expectation is for inflation to show a rise YoY up to September of 1.8% up from 1.7%. Focus will also turn to wage inflation, due to concerns that employment levels and wage rises have peaked. 

EUR 

The ongoing Brexit issues will directly impact on the value of EUR/GBP, the value of EUR/USD will be affected by the political issues in the USA. Otherwise, it’ll be economic calendar events and data releases which cause movements in the euro over the coming week. On October 7th the latest German manufacturing orders are predicted to show a -6.6% contraction YoY up to August, with the monthly figure expected to reveal a drastic improvement to -0.4%. On October 10th the latest import, export and trade balance data for Germany will illustrate the current state of manufacturing in the Eurozone’s engine of growth. The minutes for the last ECB policy meeting will also be published on the same day. Germany’s latest CPI data is broadcast on October 11th. 

JPY and CAD 

On October 8th a raft of Japanese data will be published including: the Eco watchers’ survey, household spending and income. The balance of trade and current account figures are forecast to reveal a dramatic improvement for August. On October 10th the latest machine order data is predicted to reveal a significant fall; down to -8.4% YoY up to August. 

On October 11th at 13:30pm U.K. time, the value of the Canadian dollar will come scrutiny and experience increased speculation, when the latest unemployment data is published for the country. Although the unemployment rate is forecast to remain unchanged at 5.7%, the amount of jobs created (both full and part-time in September) is forecast to show a significant fall.

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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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