Central Bank Bonanza Continues
Following last week’s Federal Open Market Committee’s (FOMC) Interest Rate decision of holding rates as they are at <1.75%, and the European Central Bank (ECB) the week before that with the same decision of keeping rates as they are, investors will turn their attention over to the Bank of England’s (BOE) Monetary Policy Committee (MPC) and their decision for interest rates.
This week, the MPC will be meeting and a decision on rates will be made as speculation in the markets that a May rate hike is out of the question following the worse-than-expected economic data that was released last week. This Thursday we will find out what the MPC has decided as the expectation on then rates to stay at 0.50%, while voting shows that there will probably some dissenters who are looking for a rate hike this month.
However, the BOE is not the only Central Bank to release its decision on interest rates, as the Reserve Bank of New Zealand (RBNZ) will also follow the Reserve Bank of Australia’s (RBA) decision to keep rates at 1.50%. The RBNZ is also expected to keep rates as they are at 1.75%, 25 basis points (0.25%) higher than the RBA which makes the New Zealand Dollar that more attractive than the Australian Dollar when considering the carry trade.
An important note to take into consideration is the fact that there is a big divergence happening in the interest rates between the U.S. and its peers. As the U.S. continues on its path of gradual rate hikes, other countries are still stuck at near the zero or negative interest rates which creates quite the advantage for the U.S. Dollar. With higher interest rates, that means that the USD becomes more attractive when considering the carry trade.
From Unemployment to Inflation
Last week, we witnessed the release of the Employment Report where the Non-Farm Employment Change came in at 164K new jobs added into the Labor Market in the U.S., while is less than the expected figure of 190K is still considered a good number. There was also the Unemployment Rate which dropped to 3.9% vs the expected 4.0%, however Average Hourly Earnings growth remained rather subdued at 0.1% on a month-to-month basis. So, an overall mixed report for the U.S., this opens the door for another important aspect of the economy, inflation.
This week, the U.S. will be releasing its CPI and Core CPI on a month-to-month basis. Last month, we saw the CPI index fall by 0.1% which meant deflation, so investors are keeping an eye out for this week’s inflation as the expectation is to rise by 0.3%. The FOMC will also have their eyes wide open for this indicator as it will tell them if they are on the correct path when it comes to their interest rate hikes.
Canada, this week, will also have its time in the spotlight with it’s Employment Report on the release schedule. The expectation this time around is an increase in employment by 19.5K, a significantly less figure than the prior month’s increase of 32.3K. This, of course, translates into the Bank of Canada’s (BOC) decision when it comes to interest rate hikes. As the Employment change is expected to increase by 19.5K, the unemployment rate is expected to remain steady at 5.8%.
War and Trade war are the main topics of the Geopolitical atmosphere of last week and will surely cascade into this week as well. Iran and Israel are back at it, with Israel firing the first shot at Iran saying that it has lied about its nuclear program and that it is still has documents about said project. The Israeli Prime Minister Benjamin Netanyahu did a press conference showing highly classified Iranian documents that showed Iran is still in possession of Nuclear documents and way of creating Nuclear Weapons.
Israel has been a fierce advocate of the Iran Nuclear Deal and backs Donald Trump in saying that the current Nuclear Deal needs to be amended and that it is a “farce”. Iran on the other hand, has neither denied or confirmed what Israel has said about it, choosing silence.
In China, the U.S. delegation made up of Steven Mnuchin, Larry Kudlow, and Robert Lighthizer have met with the Chinese government over the ongoing trade war between the two, and things are shaky is an understatement. The U.S. delegation gave the Chinese government a list of demands disguised as “asks” including a plethora of “U.S. favorable” points such as cutting the trade deficit by $200 Billion by 2020.
The Chinese government was not swayed by these “asks” as the talks appeared to have produced no breakthroughs, but at least the first day talks have been “cordial”. As talks progress, we are bound to see tensions run high and people are forced to come to a decision as no compromises are given.
As this week gets under way, investors will be focusing on the GBPUSD as last week’s United Kingdom’s Local elections gave some investors insight on who will be in control of the Brexit proceedings when the House of Commons meet again to discuss the Brexit bill. However, this week’s focus will be at the MPC’s decision alongside the BOE’s inflation report for the second quarter. The pair is trying to break below its 200-Day Moving Average at 1.3530 which happens to be an important supportive level for the pair as well. The Fibonacci Retracement of the low of October 2016 and the high of April 2018 shows that the pair broke through the 23.6% retracement and heading towards the 38.2% level at 1.3430, assuming it can break below the 200-Hour Moving Average.
The USDCAD will also be an important instrument to look at because of its connection to the Crude oil, which reached its highest level since 2014 on Friday of last week. With the Employment report coming from Canada this week and the Oil breakout happening last week, the USDCAD is bound to be an interesting trade. The Fibonacci Retracement connecting the highs of May 2017 to the lows of September 2017, shows that the pair is consolidating at the 50.0% Fibonacci level at 1.2930. Previously, this level has held the pair in a head and shoulders pattern where it broke higher reaching the 61.8% and then dropped back towards the 23.6%. Currently, if the pair manages to break though the 50.0%, more strength to the USDCAD is ensured, however, that needs to correspond with either a severe drop in oil prices of a bad employment report from Canada.