Today’s Key Market Drivers: 14th August 2019
Yen sinks after the US gives trade concessions.
The US administration sent the Yen screaming lower and stocks flying back higher on Tuesday after announcing it will delay some of the impending new trade tariffs and remove some others entirely. The move was seen as a major concession to China and has removed much of the trade war tension that was building up in financial markets since Donald Trump announced over a week ago the US would be adding 10% of tariffs to $300 billion of Chinese imports from September 1st.
The price action that we have seen with such a strong move higher on US stock index markets is a pressure release if nothing else. The global economy has been fearful a US / China trade war would derail economic sentiment and substantially reduce GDP in the coming 12 months. It appears the hard-line approach the Trump administration has been running with softened on Tuesday and financial markets loved it.
This could be a short-term game changer for stocks and the safe havens with the recent slide lower on stock indexes likely to now reverse on this new headline news. Safe haven currencies such as the Yen and Swiss Franc that have been benefiting from the ratcheting up of trade tensions may now reverse their rally higher and begin a new trending direction to the downside. The AUD and NZD will also likely reverse their recent downtrends.
US Inflation figures beat market estimates.
As I expected, the latest US inflation figures beat market estimates coming in at 0.3% for the month of July vs the 0.2% expected and the annualised figure also beat economists’ estimates with a reading of 1.8% vs the 1.7% expected. The US Dollar rallied strongly following the data release particularly against the Japanese Yen which is now under pressure to head back lower in a new trending direction.
The reason the US Dollar was supported post the stronger than expected US inflation figures is because if inflation is rising in the US or maintaining previous levels there is a likelihood the US Fed won’t drop interest rates. Inflation will need to weaken for the Fed to confirm another rate cut is on the way. The tariffs adjustment news was also released around the time of the CPI number so figuring out which had the biggest impact on the US Dollar doesn’t really matter, it was all positive.
Aussie Wages data will move the AUD today.
Wages in Australia have flat-lined for the past decade and today the market will have the opportunity to digest the latest national wages index number. Traders are expecting wages to have grown 2.3% annually so if the number comes in under this figure, we will likely see investment banks and hedge funds sell the AUD back lower.
Wages have not been keeping up with inflation and that is one of the biggest reasons why the RBA has been consistently forced to lower interest rates. If the RBA did not lower interest rates most Australian’s who are already mortgage stressed would not be able to pay the bills and the country would fall very quickly into a recession.
The by-product of lower interest rates is a lower AUD against any other currency that has a stronger economy where interest rates are higher. The USA as a great example.
Traders expect the US Fed to lower rates in September.
They won’t! CNBC reports this morning. “Financial markets have fully priced in an interest rate cut in September. Expectations that rates will be cut by 25 basis points rose to 92.7% from 84.6% a day prior as fewer traders bet on a more dramatic 50-basis-point cut next month.”
I think the market has it wrong and I think the US Fed will not drop rates in September and they will wait for signs the US economy is weakening. Tuesday’s better than expected inflation reading is a good indication to how well the economy is still doing and just last month the Fed did not indicate that future rates cuts were a 92.7% certainty.
The focus will turn to European data today.
Now that there has been a pressure valve released in the US / China trade tensions the focus will turn to the Euro Area and UK with the release today of the latest Euro Zone GDP and UK inflation figures. I said recently that any rally on the Pound will likely be viewed as an opportunity for professional traders to short it again and today’s inflation figures if lower than expected could give traders the go-ahead to sell the Euro off once again.
The Euro v US Dollar escaped any major moves on Tuesday however the Euro Zone GDP number today could give traders a reason to sell the Euro out of the sideways trading range that it has going against the US Dollar. The market expects second-quarter growth to be 1.1% so anything under 1% would be a red flag and traders would take to the Euro very quickly. It would also give traders even more reason to expect a stimulus package and lower interest rates from the ECB.
I was once reminded that if I want better results do less complaining.
About the Author: Andrew Barnett
Andrew is a professional trader and successful investor who has a strong focus on education. He is a regular Sky News Money Channel Guest and one of Australia’s most awarded and respected financial experts and is regularly contacted by the Australian Media for the latest on what is happening with the Australian Dollar. Director at LTG GoldRock, Andrew Barnett, guides thousands of traders around the world in the live market on a daily basis, advising them on buy and sell directions, as well as trading his own personal account. Andrew, a regular keynote speaker at trading and wealth-creation events throughout the Asia Pacific region, is an authorized representative registered with the Australian Securities and Investment Commission (ASIC).
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