The Week Ahead – Yen , Inflation and Cable

The Week Ahead – Yen , Inflation and Cable

Previous week: 02 October 2017 – 06 October 2017

Reserve Bank of Australia Rate Decision—3 October 2017 Tuesday

No change in interest rates (+1.50%) was decided upon by the Reserve Bank of Australia. However, Professor Harper, a board member on the RBA, said that the RBA is not ruling out a possible rate cut.

“The thing that is causing an issue for us (the RBA board) is slow growth in wages, which is feeding into slow growth in household income.” “If you start to lose that momentum, that might be the basis of some sort of policy action” “You wouldn’t want to be jumping the gun and tightening too quickly,”

http://www.theaustralian.com.au/business/economics/reserve-bank-of-australia-still-not-ruling-out-rate-cut/news-story/59a48e6fbf87919d3b5c8738dbd25991

An increasingly bullish rate statement. However, wage growth is still the biggest worry for the RBA.

Image of comparison of October v September rate statement, taken from RBA.

US Crude oil inventories—10.30 pm 04 October 2017 Wednesday

US crude inventories decreased by -6.023 million barrels on the expectation of -0.5 million decrease. Baker Hughes US oil rig count decreased by 2 from 750 to 748. Oil production was 9561 barrels per day for week ending 29/09/2017, an increase from 9547 barrels per day in the previous week. Hurricane Nate is closing in on Louisiana and oil firms are starting to halt production.

http://www.zerohedge.com/news/2017-10-04/wtirbob-jump-after-big-crude-inventory-draw-exports-hit-record-high

http://www.zerohedge.com/news/2017-10-06/wtirbob-plunge-saudi-russia-comments-rig-count-resumes-decline

https://www.eia.gov/dnav/pet/hist/LeafHandler.ashx?n=PET&s=WCRFPUS2&f=W

Change in Non-farm Payrolls, Unemployment Rate, Average Hourly Earnings—Friday 06 October 2017

Name Actual Expected Last (with revisions)
Non farm employment change -33k +82k July: +189k to +138k

August: +156k to +169k

Unemployment rate +4.2% +4.4% +4.4%
Average Hourly earning m/m +0.5% +0.3% August: +0.1% to +0.2%
Average Hourly earning y/y +2.9% +2.6% +2.7%
Participation rate 63.1% 62.9% 62.9%

Give Trump a pass. There was several hurricanes last month.

http://www.zerohedge.com/news/2017-10-06/september-payrolls-tumble-33000-first-drop-seven-years

Donald says this, Jong-un says that

Donald said “Calm before the storm” without providing any context.

Donald called Jong-un a “rocket man” while Jong-un responded by calling Donald a “mentally deranged U.S. dotard”. Even though it is my opinion that nuclear war will not occur, it is undeniable that tensions between feuding parties have escalated and will continue to do so. North Korea is now threatening to detonate a hydrogen bomb in the Pacific Ocean. What if, in the off-chance, a mistake occurred and a nuclear warhead detonates over the sovereign land of Japan? The result of such a mistake will, without a shadow of a doubt, be a declaration of war.

Coming week: 02 October 2017 – 06 October 2017

US Crude oil inventories—10.30 pm 05 October 2017 Thursday

Another draw in inventories?

FOMC Meeting Minutes—3am 12 October 2017 Thursday

Informative to see the justification of the Fed for initiating Quantitative Tightening.

US CPI—9.30pm 13 October 2017 Friday

The trend of lackluster, transitory, idiosyncratic always missing 2% inflation continues.

US Retail Sales—9.30pm 13 October 2017 Friday

Trade Ideas

USD/JPY short?

A big bearish pinbar was formed at 113. However it is not at any resistance level.

Trump continues to keep tensions around the world high with frequent comments on Iran and North Korea. Just last week he said “Calm before the storm” without clarifying what the storm was meant to refer to.

Inflation may have just have come round in Japan. In August, core CPI rose another two tenths of one percent to a new cycle high of +0.7%. Though 0.7% is still pretty far from the 2% target, it is still progress made by the central bank.

https://tradingeconomics.com/japan/core-inflation-rate

EUR/USD long?

1.17 seemed to be support for EUR/USD when looking at the daily chart. However, when viewing the weekly chart, if 1.17 support does not hold, there is potential that it will drop to the next support at 1.14.

ECB’s target for inflation is “inflation rate of below, but close to, 2% over the medium term.” Inflation does look stable at around 1.5%, which itself is below 2% ceiling.

GBP/USD long to watch and wait

The British Pound had been in an uptrend since the start of the year.

There are nine members in the BOE MPC. With 3 doves coming out publicly saying that they are now hawkish, the whip count is now 5 members in favour for rate hike. This implies that a simple majority is now present to raise interest rates.

Name Voting Record Dove/Hawk Edmund’s Whip Count
Mark Carney 0 to increase, 46 to maintain, 1 to reduce Dove Raise
Ben Broadbent 0 to increase, 71 to maintain, 1 to reduce Dove ?
Sir Jon Cunliffe 0 to increase, 42 to maintain, 1 to reduce Dove ?
​Sir David Ramsden 0 to increase, 1 to maintain, 0 to reduce Dove ?
Andrew Haldane 0 to increase, 35 to maintain, 1 to reduce Dove Raise
Ian McCafferty 14 to increase, 42 to maintain, 1 to reduce Hawk Raise
​Michael Saunders 3 to increase, 6 to maintain, 0 to reduce Hawk Raise
​Silvana Tenreyro BOE: 0 to increase, 2 to maintain, 0 to reduce

Bank of Mauritius: 0 to increase, 8 to maintain, 3 to reduce

Dove ?
​Dr Gertjan Vlieghe 0 to increase, 19 to maintain, 2 to reduce Dove Raise
Edmund’s prediction 5 to raise / 9

 

UK Inflation:

Looking at the 10 year chart of UK’s inflation, is it not inconceivable that inflation will rise up to 5%? Quoting the Bank of England from monetary policy statement dated 14 September 2017: “Headline and core CPI inflation in August were slightly higher than anticipated.  Twelve-month CPI inflation rose to 2.9% and is now expected to rise to above 3% in October.”

UK Wage growth:

Wage growth has been steady at around 2% for several years. However, in real terms, wages are shrinking because inflation is running at 2.9%, which is higher than the pace of wage growth.

UK Unemployment:

The labour market gets tighter every month and is definitely getting very close to the natural rate of unemployment.

UK GDP:

Annualised GDP growth rate had been steady at around 2% since 2010.

USD’s side of the argument:

  • The Federal Reserve is very far from reaching their 2% PCE core inflation target. It is currently at 1.3% and moving away from the 2% target. The 89.2% rate hike probability for December’s meeting seemed to totally dismiss any concerns by the Fed for the lack of inflation.
  • Donald Trump is (and had always been) a wild card. He (and the GOP) failed to repeal and replace of Obamacare. He may just fail to pass his tax cut / reform plan (which has much greater implications to corporate profitability).
  • Donald’s beef with Kim. The ongoing escalation of tensions with DPRK led to buying of safe havens like US Treasuries, Japanese Yen, and Gold. Lowering of yields in US Treasuries will make it hard for the US Dollar to rally.
  • The Federal Reserve is tightening their monetary policy (argument for USD strength).

Image of US core PCE year on year taken from Investing.com:

https://www.investing.com/economic-calendar/core-pce-price-index-905

Fed’s rate hike odds is now at 89.2%. Basically a rate hike in December has already been priced in.

http://www.cmegroup.com/trading/interest-rates/countdown-to-fomc.html

Counterargument:

Short sterling is pricing in around 80+% of a rate increase by the Bank of England by December 2017, but not completely.

https://www.theice.com/products/37650330/Three-Month-Sterling-Short-Sterling-Future/data

 

 

The Week Ahead - Sterling and Yen The Week Ahead - Cable Strength