Are we Heading for a Currency War?

Weekly Report - 28/01/2018


The Weak US Dollar and the Trump effect

The weaker US Dollar was embraced by Steven Mnuchin, the US Secretary of Treasury, “Stronger dollar is in the best interest of the country.” The weaker dollar might not alarm the Federal Reserve very much, in fact it could help the central bank finally achieve its 2% inflation target, economists said last Wednesday. A weaker dollar increases demand for US products and services and can boost import prices, pushing consumer prices up at an even faster pace. This would be welcome at the Federal bank as inflation has lagged below the Fed’s 2% target since the 2008 Great Recession.

The sterling was also among the best gainers last week as it finally broke the $1.40 threshold against the US Dollar. The cable received a lift following the better UK Q4 GDP data, over optimism that the economy is doing better than predicted.

Crude oil was on course for its third weekly gain this month as the cheap U.S. Dollar increased demand for dollar-denominated commodities as supply tightens. Crude oil inventories recorded the 10th week of drawdown on American stockpiles. The crude market will remain backwardated throughout this year with prices trading between $60 and $75 a barrel, Mercuria Energy CEO Marco Dunand said during an interview in Davos.


Earnings Calendar is boiling ahead of the FOMC meeting and the NFP

2018 begins with a promise that there is a lot more to come. The biggest events of this coming week are also coming from the USA. First, the FOMC will be on Wednesday, and then the January jobs report on Friday.

The FOMC meeting draws the attention as a new Fed leadership regime takes the wheel, and investors are eagerly awaiting any changes to the assessment of the U.S. economy and the progress towards achieving monetary policy goals. At this Fed meeting the expectations are to keep the interest rates unchanged. Traders will look for hints whether the Fed will stick in the prospects of 3-hikes in 2018. It is also important to note that the Q4 U.S. real GDP came to be above the trend at 2.6% annualized rate of growth (2.3 percent for full year 2017). The Q4 GDP performance does little to alter expectations for a March Fed rate hike.

On Friday, the market will look for an uptick in the number of jobs added during the first month of the year. Expectations are for +180K, up from +148K in December. At the same time, the Unemployment Rate and the Average Hourly Earnings will be released where they could spur volatility. It is expected that wages have been increased by 0.3% in January where if it comes in line with the outlook then inflation target could be even more achievable.

There are several other economic announcements on the calendar; Core PCE on Monday and Eurozone’s Consumer Price Index on Tuesday. Thursday is marked by ISM Manufacturing/Employment reports from Germany, the UK and the US as well.

This week will also be heavy on the earnings calendar. PayPal, Boeing, AMD, Microsoft, Facebook, Alibaba and Apple are only few of the high market capitalization companies that will report their earnings for the fourth quarter of 2017 this week. Overall, this earnings season has been strong thus far. Of the S&P 500 companies that have reported as of Friday morning, 77% have reported-better-than-expected earnings while 79% have surpassed sales estimates, according to data from FactSet.



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