It was refreshing to watch Federal Reserve Chair Jay Powell’s engaging discussion with the Economic Club of Washington last Thursday. He came across as a man who is willing to listen and flexible enough to react. He also comes across as a person blessed with intelligence, integrity, humility and humor. When he explained the Fed’s positioning on interest rate policy, he made clear that each member of the committee has a voice and that they conduct their meetings with trust and transparency. It gave me the sense that the Fed really is on top of the delicate economic situation that prevails at present in the US. In a week that saw bitterness and rancor in local American politics and also in UK politics, I must also say that the discussion was actually the high point of my week analyzing the markets. Mr. Trump’s bloviations about the Mexican Wall and Mrs. May’s desperate attempt to hang on to her Brexit deal were just irritating noise in comparison. The Bank of Canada’s interest rate decision and US CPI were perhaps the data highlights of the week. The FOMC minutes were also worthy of note.
So, what I learnt from the Fed is that whilst the FOMC looks domestically at three main drivers in economic data, namely employment, GDP and inflation, it also has an eye on US markets as well as the Global political and market situation. It was clear from the minutes that whilst employment data and GDP are strong, inflation is a cause for concern and there will have to be strong evidence of an uptick in inflation before the Fed raises interest rates this year. US CPI, which was released on Friday, came in at a benign 1.9% Y/Y for December as if to reinforce the point.
The Bank of Canada’s decision to keep interest rates on hold at 1.75% was in my mind a correct one. The Canadian dollar had strengthened all week in tandem in with oil and with general dollar weakness and perhaps also in anticipation of a rate hike to 2%. The fact that the Fed has taken its foot off the pedal has perhaps given the Bank of Canada room for manoeuvre and the ability to avoid like for like hikes with its neighbor for the time being. From here though, I see US data as relatively better than Canadian data and therefore am tempted to sell this small CAD rally.
This week, all eyes will be on the UK as the UK parliament votes on Prime Minister Theresa May’s BREXIT agreement with the European Union. It is highly likely to fail, triggering all manner of reaction and comment in both the UK conservative party and the opposing labor party, UK businesses and the EU. The GBP rallied towards the end of last week on the likelihood that one of the contingencies is to extend the date that the UK commits to leave the European Union. Buying time or breathing space does not in my mind help the UK, its economy or the Pound. I sense the pound will be volatile and difficult to trade and so I will wait until after Tuesday to choose my trading levels.
In terms of data, we have CPI data from the UK on Wednesday expected at 2.2% Y/Y for December, the Eurozone on Thursday expected at 1.6% Y/Y December, Japan on Friday expected at 0.8% Y/Y December and Canada, also on Friday expected at 1.7% Y/Y December. Watch out on Monday for Fed Chair Powell who will testify to the Joint Economic committee and for US retail sales on Wednesday expected at 0.2% M/M for December.
Good Luck and Good Trading, Ben Robson
Ben Robson is the CEO of Spectrex Commodities and author of Currency Kings- How Billionaire Traders Made Their Fortune Trading Forex And How You can Too.