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MONTHLY MARKET INSIGHTS N O V E M B E R 2 016


USD

MONTHLY MARKET INSIGHTS

NOVEMBER MARKET REVIEW

THE MONTH AHEAD

In a shocking result, Republican Donald Trump upset Democratic favorite Hillary Clinton in America’s presidential election in early November. Perhaps even more surprising than the election result was the fact that global markets and the dollar in particular, took the news in stride. The U.S. dollar index soared to near a 14-year peak this month in an accelerating rally that was fueled by a sharp rise in Treasury bond yields. Investors viewed a Trump Administration as likely to be inflationary and perhaps, result in a faster pace of Fed rate hikes in 2017. The rise in U.S. bond yields propelled the dollar higher across the board but was particularly damaging to emerging markets like Mexico, Brazil, Turkey, India and South Africa, whose currencies’ relative appeal against the greenback was eroded by the rising U.S. yields. Relatively strong U.S. economic data this month all but cemented expectations for the Fed to lift U.S. borrowing costs in mid-December and perhaps, to follow up with another dollarsupportive rate hike in Q1 2017.

The final Federal Reserve meeting of 2016 is widely expected to result in only the second increase in U.S. rates in nearly a decade. The Fed entered 2016 expecting to lift borrowing costs four times and was repeatedly forced to stand pat by market tantrums and global uncertainties. While a December hike is increasingly seen as a foregone conclusion, the Fed’s guidance on its policy outlook for 2017 will be critical for the dollar’s performance over the coming months. Any indication that the Fed could even marginally increase its pace of policy normalization in the coming year would likely support the dollar. The early December payrolls report will be important in setting market expectations for the December Fed meeting and beyond. A solid print for jobs could not only cement expectations for a mid-December rate hike, but also bolster the case for another increase in rates in March 2017. Political news will likely continue to play an increasing role in the dollar’s near-term performance. Cabinet appointments that are seen as moderate, market-friendly choices that are likely to bolster a pro-business, pro-growth agenda will keep alive hopes of increased fiscal support and underpin the dollar.

USD INDEX NOVEMBER 102 101 100 99 98 97 96

KEY MARKET EVENTS DEC 2 DEC 15

NOVEMBER EMPLOYMENT REPORT NOVEMBER CPI

DEC 22

DEC 5

NOVEMBER ISM SERVICES INDEX

NOVEMBER DURABLE GOODS ORDERS

DEC 14

FOMC MONETARY POLICY ANNOUNCEMENT


EUR

MONTHLY MARKET INSIGHTS

NOVEMBER MARKET REVIEW

THE MONTH AHEAD

The euro tumbled to its lowest level since March 2015 against the broadly stronger U.S. dollar this month. Soaring Treasury bond yields amid mounting expectations that a Trump Administration could push U.S. inflation higher fueled the greenback’s broadly improved tone.

Euro zone political headlines will likely dominate the first part of the month with a constitutional referendum in Italy on December 4th likely to result in a “no” vote, which could unseat Prime Minister Mateo Renzi force an early election in 2017.

Mounting political uncertainty ahead of Italy’s constitutional referendum in early December weighed on the single currency. A “no” vote on a bid to slash the number of senators and give the head of state increased power could unseat Prime Minister Mateo Renzi, result in an early 2017 election and hand more power to the antieuro Five Star Movement.

The ECB’s Governing Council meeting on December 8th will also be a key event for the euro in early December. A “no” vote in Italy’s referendum just days before the ECB meets could force the central bank to backstop Italy’s shaky banks and also potentially open the door to additional monetary support for the 19-member bloc’s economy.

French political uncertainty was allayed a bit by the victory of former PM Francois Fillon in the center-right’s primary election ahead of a broader national election next year. Mr. Fillon is seen as a strong candidate against the more extreme and anti-euro National Front leader, Marine La Pen.

German sentiment data later in the month will be closely watched for any signs that mounting political uncertainty in the bloc is staring to creep in to morale among businesses and analysts in the euro zone’s largest economy.

While euro zone economic data, particularly PMI reports from across the 19-member bloc, showed encouraging strength this month, they did little to meaningfully reduce the risk that the ECB will extend its 80 billion euro monthly asset purchase program when it meets in December.

Outside of euro-specific events and data, developments in the U.S. will drive the direction of EUR/USD. Further rises in U.S bond yields and optimism about fiscal spending from a Trump Administration should keep the euro biased lower.

EUR/USD NOVEMBER 1.12 1.11 1.10 1.09 1.08 1.07 1.06 1.05

KEY MARKET EVENTS DEC 4 DEC 13

ITALY CONSTITUTIONAL REFERENDUM

DEC 6

DECEMBER GERMAN ZEW INVESTOR MORALE

Q3 EURO ZONE GDP (REVISED)

DEC 19

DEC 8

ECB GOVERNING COUNCIL MEETING

DECEMBER GERMAN IFO BUSINESS SENTIMENT


JPY

MONTHLY MARKET INSIGHTS

NOVEMBER MARKET REVIEW

THE MONTH AHEAD

The Japanese yen tumbled to an eight month low this month as the jump in U.S. Treasury bond yields following the surprising U.S. election result sent yield hungry Japanese investors flocking to U.S. assets. Optimism surrounding a potential jump in fiscal spending under a Trump Administration sent the yield on the benchmark 10-year U.S. Treasury bond to its highest level since July 2015 and the two-year yield to its highest level since April 2010. The Bank of Japan followed through on earlier promises to keep yields on 10-year Japanese Government Bonds (JGB’s) anchored by offering to buy an unlimited amount of securities at a yield below zero. The move suggests that policymakers in Japan will not easily allow yields in their markets to follow U.S. yields higher- a scenario that should keep the yen pressured. Soaring global stocks and the generally upbeat mood in global financial markets for much of November, despite the surprising U.S. election results on November 8th, kept the safe haven Japanese yen pressured.

The quarterly Tankan survey of large manufacturer sentiment is always a closely watched gauge of overall sentiment in the world’s number three economy and is seen as good forward-looking indicator of capital expenditure among the nation’s largest firms. A disappointing report could highlight the very soft growth backdrop in Japan and keep alive the risk of additional BOJ action. While investors currently see little risk of additional policy action by the BOJ meaningfully weakening the yen, officials are not likely to sit idly by while rising yields threaten the little economic progress that has been made. Consequently additional BOJ action to keep Japanese yields anchored is possible. Such a scenario should weigh on the yen. As always, Japanese inflation data will be closely watched for any signs that chronic deflationary pressures are easing. Another disappointing CPI print could fuel expectation for further BOJ action, likely in the form of further bond market interventions. A December Fed rate hike and a statement that hints at a potentially faster pace of rate increases next year would keep dollar/yen biased firmly higher.

USD/JPY NOVEMBER 115 113 111 109 107 105 103 101

KEY MARKET EVENTS DEC 7

Q3 GDP (REVISED)

DEC 13

DEC 19

BANK OF JAPAN MONETARY POLICY MEETING

Q4 TANKAN SURVEY

DEC 26

DEC 18 NOVEMBER CPI

NOVEMBER TRADE BALANCE


GBP

MONTHLY MARKET INSIGHTS

NOVEMBER MARKET REVIEW

THE MONTH AHEAD

The British pound briefly rose to over a one-month peak as investors remained optimistic that the U.K. parliament would ultimately have more oversight over the Brexit process than originally though. A parliamentary vote could reduce the chances for a “hard Brexit”. The surprising U.S. presidential election result this month and the mounting political uncertainty surrounding upcoming votes in the euro zone took some political pressure off of the pound. Sterling was no longer the only major currency to be saddled with elevated political risk. Some of the pound’s allure was dulled by a leaked memo that suggested that Conservative Party leaders had no real strategy for the Brexit and that agreeing among themselves on a course of action could take up to six months. U.K. economic data continued to paint a surprisingly upbeat picture of the nation’s economy in the wake of the Brexit vote in June. The Bank of England refrained from following up August’s aggressive policy easing with another move this month given the economy’s surprising resilience so far.

The Bank of England’s MPC meeting and the release of the meeting minutes on December 15th will headline this month’s calendar. While no change is expected from the BOE at this time, any guidance on the outlook for rates, in light of the surprisingly resilient economic data since the Brexit will be particularly closely watched. A U.K. High Court appeal this month will decide on whether or not Prime Minister Theresa May must consult with parliament before invoking Article 50 of the Lisbon Treaty. Parliamentary oversight over the Brexit would mean less risk of a “hard Brexit” and likely support the pound.

GBP/USD NOVEMBER 1.270 1.265 1.260

The quarterly reading of the U.K.’s current account balance will be more closely watched in light of the recent Brexit vote. A massive current account gap keeps sterling vulnerable, especially if the U.K. cannot attract the needed foreign investment to offset the steady outflow of pounds.

1.255

The pound remains vulnerable, as do most major currencies, to a broadly stronger U.S. dollar. A Fed rate hike in mid-December and an indication that rates could rise further in the first quarter of 2017 should keep the greenback biased higher against the pound.

1.225

1.250 1.245 1.240 1.235 1.230

KEY MARKET EVENTS DEC 5 DEC 15

NOVEMBER PMI SERVICES SECTOR INDEX BANK OF ENGLAND MONETARY POLICY MEETING

DEC 9

OCTOBER TRADE BALANCE

DEC 22

DEC 13

Q3 CURRENT ACCOUNT BALANCE

NOVEMBER CPI


CAD

MONTHLY MARKET INSIGHTS THE MONTH AHEAD

NOVEMBER MARKET REVIEW The Canadian dollar fell to an eight and a half-month trough against the greenback this month as a broad U.S. dollar rally and a drop in crude oil prices to their lowest level since early August left the loonie on the defensive. The rise in U.S. bond yields, mounting expectations of a potentially faster pace of Fed rate hikes in 2017, a dovish Bank of Canada and still generally depressed crude oil prices (for most of the month) undermined the appeal of the Canadian dollar. While there was no Bank of Canada meeting this month, generally lackluster economic data kept alive the view that the BOC will maintain a dovish bias, which contrasts the outlook for the Fed to normalize U.S. monetary policy in December and possibly again in the first quarter of 2017. A late November OPEC meeting of oil producing nations in Vienna kept volatility in the oil market elevated. Swings in crude oil late in the month kept the loonie’s trade against the greenback choppy and ultimately helped lift the Canadian dollar to a three-week high late in November.

Early December’s Bank of Canada monetary policy meeting will headline the economic calendar for the month. While BOC Governor Poloz has recently said the bar for cutting interest rates remain high, the bank is still widely expected to maintain a dovish tone given the overall softness in recent domestic data. Aside from domestic data, movements in the price of crude oil in the wake of the late November OPEC meeting will continue to move the loonie. While a run up in oil prices could prove supportive, it may not be enough to overshadow the widening yield advantage that U.S. assets offer over their Canadian counterparts. Employment, inflation and retail sales data will be particularly important as these figures have largely surprised to the downside over recent months and have kept the door to further Bank of Canada monetary policy easing open. Developments south of Canada’s boarder will be as important for the loonie’s direction as any domestic economic reports this month. Strong U.S. data, an expected Fed interest rate hike and a signal that U.S. rates could rise again in the first quarter of 2017 should keep USD/CAD biased higher.

USD/CAD NOVEMBER 1.365 1.360 1.355 1.350 1.345 1.340 1.335

KEY MARKET EVENTS DEC 2

NOVEMBER EMPLOYMENT REPORT

DEC 22

NOVEMBER CPI

DEC 6

OCTOBER TRADE BALANCE

OCTOBER RETAIL SALES

DEC 7

BANK OF CANADA MONETARY POLICY ANNOUNCEMENT


AUD NZD &

NOVEMBER MARKET REVIEW The Australian dollar tumbled to a five and a half-month low against the broadly stronger U.S. dollar as the rise in U.S. Treasury bond yields in the wake of the surprising U.S. election result in early November undermined the yield appeal of the Aussie for global investors. The New Zealand dollar tumbled from a two-month peak in early November to hit its lowest level since early July against the resurgent U.S. dollar. Higher U.S. yields sent the greenback soaring against riskier and commodity-linked assets. The Reserve Bank of New Zealand delivered on an expected interest rate cut in early October, driving the bank’s overnight lending rate to its lowest level ever. The fact that the RBNZ suggested a lower risk of future cuts to the cash rate helped limit the kiwi’s losses. Soaring iron-ore and coal prices late in November helped underpin the commodity group of currencies and propelled the Aussie to a 10-day high. While rising U.S. yields could weigh on the dollar-bloc currencies, the prospect of stepped up infrastructure spending in the world’s largest economy could keep commodities biased higher and limit the group’s downside.

MONTHLY MARKET INSIGHTS

THE MONTH AHEAD This month’s headline event in Australia will be the RBA’s Policy Board meeting in early December. Investors expect no changes from the RBA, especially given the recent uptick in domestic economic data, inflation in particular. Still the statement will be analyzed for any hits that policymakers are becoming more frustrated with the strength of the AUD. New Zealand’s Q3 GDP data will headline the kiwi’s calendar this month. Any signs of continued weakness in the nation’s economy could reintroduce the risk albeit minimal, for another RBNZ interest rate cut next year. Aussie GDP for the third quarter will also be very closely watched, but given the tenor of recent economic reports, especially the uptick in Q3 inflation, only an extremely weak reading of GDP could revive talk of an RBA rate cut in the months ahead. The higher yielding AUD and NZD, along with other riskier and commodity-linked assets, will remain vulnerable to further U.S. dollar strength. In particular, further rises in U.S. yields or expectations for a faster pace of rate hikes next year by the Fed will keep these currencies pressured.

KEY MARKET EVENTS DEC 5 DEC 14

0.775 0.765 0.755 0.745 0.735

NZD/USD NOVEMBER 0.750 0.740 0.730 0.720 0.710 0.700

AU RESERVE BANK OF AUSTRALIA POLICY BOARD MEETING AU NOVEMBER EMPLOYMENT REPORT

AUD/USD NOVEMBER 0.785

DEC 21

DEC 6

AU Q3 GDP

NZ NOVEMBER TRADE BALANCE

DEC 14

NZ Q3 GDP


MONTHLY MARKET INSIGHTS 1-800-239-2389 contactus@commonwealthfx.com COMMONWEALTHFX.COM

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Commonwealth FX Monthly Market Insight - November 2016 edition  

The Fed looks set to raise rates for only the second time in nearly a decade in mid-December. How will markets react? The post-U.S. electio...

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