After weeks of big falls on Wall Street risk assets are positive again after Federal Reserve Chairman Jay Powell’s comments on Friday, which hinted at a pause to the gradual rate increases the Fed have adopted over the last year. Powell also tried to play down turmoil in the markets, and insisted that the central banks tightening policy had not and will not contribute to the dent in risk assets any further.
After the comments on Friday stocks jumped higher while the US dollar fell in line with expectations. It was a much-needed boost for stocks, which had the added help of a bumper US jobs report which saw the Non Farm Payroll number smash expectations showing 312K new jobs created vs the expectations off 177K.
The coming week will see focus shift to the ongoing battle over border security, as funding for “The Wall” remains the stumbling block that sees the US government still in partial shutdown. Talks at home between Republicans and Democrats, and talks away between US and Chinese representatives will be where investors place their hope for a continuation of Fridays bullish moves on stocks. Successful trade talks would be a big boost for the US dollar.
Again, for the Euro it could be a continuation of the rather quiet start to the year, but only after we saw better than expected retail sales readings for November. The Euro has been particularly quiet over recent months, and against the US has been capped by some important technical levels. The Euro has been lagging behind many of its G10 currency counterparts over the last couple of months of the year, as the gradual Eurozone recovery continues.
There are still the issues of political uncertainty for Europe with Italy, and Germany, but the biggest issue going into the first week of trading in 2019 is the continued fear that President Trump will turn his gaze on the European auto industry.
There is no getting away from the fact that recent data paints a bleak picture of future Eurozone growth. With inflation set to fall in the next few quarters on the back of lower energy prices, it could be the numbers like Monday’s retail sales could be the lifeline that keeps the Eurozone propped up.
The new year brings the same old stories for Sterling as Brexit rears its head yet again. However despite all the headlines of December we seem to be no further forward with the UK’s withdrawal plan, with the same old problems still dominating. The meaningful vote, which was cancelled by Prime Minister Theresa May back in December is now scheduled for the week of 14th January with the debate resuming on Wednesday of this week.
The most likely scenario here remains that the Prime Minister’s deal will be rejected, and potentially by a large margin. With the return of Brexit uncertainty the Pound is likely to see any upside limited, as any positivity taken from Friday’s US headlines its drowned out by Brexit woes, it may have been almost a month of silence on the issue, but Brexit is no doubt the biggest risk to Sterling in 2019.
The focus for Canada this week remains on how many rate hikes to expect in the new year. Friday’s Canadian jobs report showed that despite some optimism wage growth failed to pick up in December, which added to the continued global growth worries means we could see a severely cautious Bank of Canada as we go through the first quarter.
From May’s 3.9% peak, November was the sixth month running to see a decline in year-on-year growth in average hourly wages to 1.5%, and stayed there in December. This weaker trend, coupled with the higher rates are beginning to feed through to growth, helping the housing market to stabilise, gives further reasons for the BoC to hold off pushing the policy rate higher this week.
Global energy prices have been under severe pressure, but have seen a recent uptick after on thin volume over Christmas. A key factor will be whether OPEC and non OPEC look to cut output further, after recent cuts seemed to have been ignored by the market and deemed insignificant.
After last weeks flash crash in the Australian Dollar and Japanese Yen investors will be hoping for a more sedate trading week. As with most currencies this time of year we have to look towards the rate outlook for any real key movements (away from a flash crash). The rate prospect for Australian however is neutral, and it seems with the global economic headwinds it could be as you were for the Reserve Bank of Australia.
The global issues do however pose a huge threat to the Aussie, with the fears of global economic slowdown one of the key issues being faced by most FX pairs. Last weeks plunge lower showed that 2019 may not be all plain sailing, and we can expect more erratic moves as the weeks roll on. Domestically this week keep an eye out for trade balance figures.
Trade talks between the US and China will be the global driving force this week, which means the Kiwi will be dominated by external forces. Donald Trump was bullish over the weekend suggesting that China needs to do a deal in order to prevent any further slowdown in the economy.
Domestically it’s looking quiet in New Zealand with Wednesday’s commodity price index and Thursday’s building permits the only releases. However there are enough global headwinds to keep Kiwi traders on their toes this week.
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Soaring US yields trigger the wrecking ball effect as yields become a source of volatility for risk, rather than a source of support