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WikiFX Fundamental Analysis


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Aug 12, 2019
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On September 18th, local time, US Federal Reserve cut interest rate by 25 basis points, lowering the target range to between 1.75%-2.00%. It’s the second interest rate cut that the Fed made this year, following the last one less than 2 months ago.

Trade frictions and global economic slowdown spurred the rate cut despite a relatively robust US economy. Previously, the ECB (European Central Bank) announced to restart QE (Quantitative Easing) scheme, central banks in UK and Japan decided last Thursday to maintain the current interest rate level, while emerging economies continued to stick to easing monetary policies. Clearly enough, global central banks have entered a new round of quantitative easing which is expected to persist, against a background of increasing down-slope pressure in global economy and gloomy outlook in geopolitical issues.

The August NFP statistics as well as other indicators suggesting an economic downdraft echoed with the observation that the US economy faces “tangible risks”, made by the Federal Reserve Chair Powell in his earlier speech. His speech and the views of several economists all suggested great possibility of another interest rate cut in September. US economist Michael Feroli even predicted that the latest NFP removed the last barrier for Federal Reserve to cut interest rate by 0.25%.

The global market, anticipating the Fed’s interest rate decision announcement on September 18th, local time in last week, had witnessed dramatic changes. Crude oil price roller-coastered after an attack on Saudi Arabia’s major oil plant; currency shortage on the market on Monday and Tuesday pushed the Fed into repurchase measures again; People’s Bank of China chose MLF (Midterm Lending Facility) operation and kept a 3.3% interest rate on September 17th quite unexpectedly. The chain of events had put considerable pressure on the Federal Reserve which, already facing both domestic and international challenges, raised global attention in every move regarding interest rate cut and the scale of adjustment.

After the recent decrease of 25 basis point, there had been divided opinions within the Fed about whether a further rate cut should take place this year. The latest Federal Reserve dot plot showed the target rate for 2019, 2020 and 2021 to be 1.875%, 1.875% and 2.125% respectively, while long-term interest rate target is set at 2.5%, in addition to the target rate of 2.375% for 2022. This suggests a plan for no further cuts in 2019 and 2020, and interest rate increases in both 2021 and 2022. Among the 17 Fed officials who participated in the vote, 7 supported another rate cut this year, 5 thought the rate should stay unchanged and 5 considered an interest rate increase is necessary.

As China is the other major global power engaged in the trade war, what measures China’s central bank will take in this global wave of interest rate cut remains in question. Despite the MLF operation of PBOC on the 17th,the market was still expecting a rate cut and looked forward to the release of LPR rate scheduled on September 20th. A financial analyst from a securities firm in Beijing observed that even if the LPR rate remains unchanged after 20th this month, from long-term perspective there’s still a high probability for lowering MLF rate in 2019, due to the growing stress in macro-economy. Xu Junzhe, the Research Director of Yu Xiu Capital in Shanghai, said that the recent wave of global quantitative easing has created favourable external environment for China’s currency policies. Overall, China is very likely to continue to pursue a marginal easing monetary policy.

The Fed’s interest rate slash stirred up the financial market, making the 3 key indices in US stock market plunged and affecting gold and bond prices to various degrees. Forex market, with most of its transactions centering around the USD, is inevitably influenced by these changes. Therefore, investors need to follow closely factors that can affect the fast-changing forex market, understand the market trend and choose the right trading opportunity. WikiFX will follow the latest forex news and make analysis of major events in the News Flash column. Stay tuned as we present you more forex updates.
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The US Dollar’s complete dominance of the global financial system shines out from a new survey of activity from the Bank of International Settlements. Despite US-China trade war, ballooning deficits and, let’s be honest, the most divisive presidency in living memory, the greenback is still on one side of fully 88% of all foreign exchange trades, the BIS said. This stark fact also underlines the importance of the Federal Reserve and its monetary policy way beyond US shores.

The Dollar was not the only example of dominance in the survey. The UK may be wrestling with Brexit but London has tightened its grip on the enormous foreign exchange market where it’s by far the leading single center. The UK capital has increased its overall marked share by six percentage points in the last three years, giving it 43% of the market. The UK also reclaimed its position as the main global hub for trading in interest-rate swaps and over-the counter derivatives. London, New York, Singapore, Tokyo and Hong Kong together control 79% of the foreign exchange market.

#USD #UK #ForeignExchange #WikiFX
Asian stocks fell on Wednesday after the U.S. lawmakers called for an impeachment inquiry into President Donald Trump, increasing the prospects of prolonged political uncertainty in the world’s largest economy.

MSCI’s broadest index of Asia-Pacific shares outside Japan was down 0.2%, Japan’s Nikkei fell 0.55%, while Australian shares fell 0.66%.

“There are a lot of factors out there that could potentially hurt market sentiment,” said Tsutomu Soma, general manager of fixed income business solutions at SBI Securities in Tokyo. However, some hedge funds have to close their books at the end of the month, so it may be difficult for the market to move.

U.S. stock futures, rose 0.19% early in Asia on Wednesday, but the mild gains are unlikely to improve sentiment for Asian shares.

The Reserve Bank of New Zealand (RBNZ) announced on Wednesday, September 25, 2019 its decision to maintain the current official cash rate, clearly showing a hawkish attitude in its public remarks. The short-term price of NZD to USD climbed over 40 pips to a weekly new height of 0.6347.

RBNZ hasn’t observed fundamental changes in monetary policy outlook with employment at a full level and inflation kept within a target range, suggesting there’s remaining scope for more fiscal and monetary stimulus.

Inflation expectation is a key signal for observers, and the market expects that New Zealand will continue to treat sluggish inflation as a sign of down-slope economy for a while. But the latest announcement shows RBNZ expects to see inflation rate inching up towards 2% under growing stress in production capacity and business profitability as well as influences of rising importation cost and wages. This suggests inflationary pressure has rallied while economic recession is alleviated, backing the view that there won’t be another interest rate cut immediately.

RBNZ is satisfied with the effect of previous interest rate cut, while the prospect of more financial stimulus on the way also helps to ease market’s expectation of further interest rate cut from RBNZ.
RBNZ also underlines that as escalating geopolitical tensions and global trade frictions continue to slow down global economic growth, economy in New Zealand also faces short-term pressure. Since New Zealand’s economy heavily depends on exportation, an aggravated global trade environment can also affect RBNZ’s expectations.

Previously-released data indicates New Zealand’s GDP growth in the 2nd quarter, although slightly lower than in the first, had exceeded market estimation. According to a statement from Statistics New Zealand, the 2nd quarter GDP growth has been mainly driven by a 0.7% increase in the service sector production, which accounts for almost two thirds of the total. A steadying NZD supports commodity money, particularly AUD, so it’s a good idea to keep a close eye on AUD/JPY.

Daily pivot points: 72.86---73.00
S1: 72.57 R1: 73.16
S2: 72.34 R2: 73.52

Recent economic statistics just released by Japan shows that after seasonal adjustment, core machinery orders in Japan declined 2.4 percent from a month earlier in August 2019, 1% less compared with market consensus. Compared to the same month of the previous year, core machinery orders tumbled 14.5% in August, contrasting July’s 0.3% increase.

The data suggests Japan’s economy is under pressure. Japanese government and the central bank is determined to take all measures necessary to revive the economy.

USD/JPY daily pivot points: 107.28---107.42

S1: 107.07 R1: 107.77
S2: 106.65 R2: 108.05

--from WikiFX analyst

Recent economic data of the Euro Zone suggests economic growth in EU is under pressure. PPI of the Euro Zone in August released earlier this month has dropped more than market expectation, while September’s PMI at 45.7, the lowest level since October, 2012, indicates a struggling manufacturing sector.

Euro Zone registered a 1% inflation in August. Inflation has been running low in most of 2019,except for a minor increase to 1.7% around June, forcing European Central Bank to cut interest rate in September and resume quantitative easing measures.

EUR/USD- Daily pivot points: 1.1002-1.1006
S1: 1.0975 R1: 1.1036
S2: 1.0943 R2: 1.1065

---This article comes from WikiFX analyst

The latest Triennial Central Bank Survey issued by the Bank of International Settlement (BIS) shows that compared with in 2016, forex spot trading has grown by 20% in the past 3 years, while swap trading has increased over a third and outright forwards increased 43%. The forex market has been recovering from the downdraft in 2016, thanks to the momentum offered by strong growth in swap and forward trading. Meanwhile, the forex market has seen several good news this week.


BIS Triennial Bank Survey

Sterling surges in the prospect of an orderly Brexit
This Thursday (October 10th), Irish Prime Minister Leo Varadkar announced after meeting with his British counterpart that the two countries may reach an agreement about Brexit by the end of the month. “I think it is possible for us to come to an agreement, to have a treaty to allow the UK to leave the EU in an orderly fashion, and to have that done by the end of October,”he said. The news drove GBP/USD up over 200 points, the largest daily increase since March.


GBP/USD daily market trend

Sino-US trade war may cool down and US may delay raising tariffs
Representatives of China-US trade negotiation said the trade talks went well after meeting on Thursday. US business associations also expressed optimism about easing of the trade tension and a delay of the tariff raise scheduled for next week. Investors are betting that the two side may reach agreements in some aspects and ease the trade tension, leading to a subside of risk aversion.


US expressed optimism about the trade talks

Despite the good news, investors should still closely follow the global forex market and particularly be careful of “black swans”, in order to fend off the possible risks during investment. The macroeconomic policies of global central banks have significant impact on currency rates, so investors can predict forex market trends by analyzing these policies. In addition, investors should pay attention to key financial data and market sentiment indicators, as they also influence foreign exchange rates. In order to better serve investors, WikiFX is offering the latest forex market trends and analysis, and you can check these updates in the WikiFX App.
For this week’s global financial market, big events are likely to cause some ups and downs on the currency market dominated by US dollar.

On Wednesday, October 9th, US Federal Reserve released minute of the monetary policy meeting on September 17th -18th . The record showed major division within the Fed, and decision for a further rate cut is unlikely to be made on October’s meeting.

The released documents showed that though most members agreed on the necessity of cutting interest rate, the opinions are still sharply divided in terms of future policy. “The minute is generally neutral, but you can clearly see the division between the Doves and Hawks”, US economist Esparaza said. “They share the same view about US economic growth, but have different opinions about the future path.”

Fed policy-makers are worrying that weak business investment, trade and manufacturing sector may weigh down on consumer spending, which has been the major driver for US economic growth in recent years. The minute shows that between the meetings in late July and mid September, there’s clearly a sluggish trend in investment, manufacturing and export, which echos the global economic slowdown and uncertainties in trade policies.

Meanwhile, China’s Vice Premiere and top trade negotiator Liu He led the Chinese delegation to Washington on October 10th ~ 11th for a new round of high-level trade negotiation with US trade chief Robert Emmet Lighthizer and Treasury Secretary Steven Mnuchin. “The market is waiting to see how the trade talks go on Thursday, and a negative outcome is likely to inspire strong risk-aversion.” Analyst from Phillip Futures Benjamin Liu observed. Other analysts also noted that good news from the trade talks can boost the market’s risk appetite and weigh on the safe-haven asset Japanese Yen; but if the negotiation isn’t smooth, risk aversion will continue to prop up the Yen.

As US President Trump earlier said that US will raise tariff against China on 15th of October if no progress is achieved in the negotiation, the market is particularly sensitive to how the trade talk evolves.

Timely and transparent information is particularly important on a fast-changing forex market. WikiFX will continue to updates on major market events and forex news in order to offer investors more reliable and helpful information.

UK announced a new Brexit deal
On October 17th, Thursday, UK Prime Minister Boris Johnson announced that he and EU leaders had agreed on a new version of Brexit deal. The news led to a surge of GBP. Thursday’s GBP/USD hit 1.2987 at its highest of the day and closed at 1.2889, up by 0.48%. Currently, the price is edging towards 1.30.

GBP/USD daily market trend

Optimism and pessimism coexist
While investors are eager to make profits from the pound’s rally, it remains a question whether the new deal will be approved by the British Parliament. It’s worth mentioning that the Democratic Unionist Party (DUP), regarded as a determining force of Brexit, had voiced clear disapproval to the deal, casting a shade of doubt on the Brexit outlook. The waves of skepticism in Britain also led to investors’ hesitation.

Marvin Barth, the Macro Strategy Director for Foreign Exchange and Emerging Market from Barclays, pointed out in his interview with Bloomberg: “The unexpected outcome of the Brexit referendum in 2016 had caused the pounds to tumble over 1,000 points against US dollar, down to its lowest since 1985. Since the Brexit vote, the pound has dropped 13%.”

Rating of Barclays on WikiFX App

EU’s Chief Negotiator for Brexit Michel Barnier said he believes the agreement will be approved by late October. For the moment, investors’ main focus is how UK Members of Parliament would react before the Parliament’s emergency meeting on Saturday( October 19th ).

Phil McHugh, Chief Market Analyst of Currencies Direct, said that if most MPs favor the new Brexit deal, the GBP may continue to rise against USD to around 1.35; but if the deal fails to pass at the Parliament, the pounds may tumble back to 1.22.

Follow the latest trends of the forex market
The forex market is sensitive, and incidents such as changes in a country’s economic policy, inflation and political factors all have direct implications on forex rates. Besides offering broker information search, WikiFX App also make timely and informative updates of forex news for investors to grasp the latest market trends.

US dollar dropped against euro last week after September’s retail sales data turned out lower than market expectation, with total retail sales down by 0.3% and core retail sales down by 0.1%.

On the other hand, euro soared to its highest in 7 weeks after Britain and EU agreed on a new Brexit deal. But as the Parliament postponed Saturday’s poll to gain more time for further discussion over details, there remains much uncertainty for UK’s withdrawal from European Union, and the market is closely observing how the pound sterling and the euro will go.

The European Central Bank announced its interest rate decision and plans for the future, while the resigning President Mario Draghi spoke at his last press conference after the ECB’s monetary policy meeting. Christine Lagarde, appointed by ECB to succeed Mr. Draghi’s position as President, will officially assume office on November 1st.

Weak inflation and downslope trend rising from global trade tensions continue to weigh on the economy of the Eurozone, and the public holds great expectation for Ms. Lagarde. Former head of IMF, she is now the first female president in ECB’s history and the only female among ECB’s 25 Executive Board members. ECB had tried to tackle the economic slump with a series of unconventional monetary policies, which are now eventually showing their side effects on the stability of the banking industry and the whole financial system. Ms. Lagarde noted during a recent interview that “ In face of a coming recession, Europe, particularly the Eurozone needs to do more to stabilize the economy and strengthen the foundation of development and financial security through measures such as consolidating the banking union, building a more comprehensive European securities market and improving the fiscal space shared by Eurozone members.” The market is closely following ECB’s monetary policy package to revive Eurozone’s economy which was slowed down due to US trade policies.

As the market anticipates the next moves of ECB’s new leader and the Brexit deadline is drawing near, both the GBP and EUR are likely to experience major ups and downs. WikiFX will closely follow the latest market trends and bring you more forex updates. You can view more forex news and market trends from WikiFX Newsflash.
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