December 6th, 2019 - 3 Things That Happened This Week
Updated: Dec 10, 2019
Shinzo Abe secures trade deal and approves fiscal stimulus in a busy week
Japanese Prime Minister Shinzo Abe has had a busy week. The Japanese PM approved the first fiscal stimulus since 2016, totaling a larger than anticipated ¥13.2tn ($121bn).
Why is Abe spending big?
Repairing the damage in the aftermath of typhoon Hagibis and protect Japan from future natural disasters.
Invest in infrastructure and upgrade the current network prior to the 2020 Olympics which is being hosted in Tokyo.
Prepare the country for the economic dip often felt by countries in the immediate aftermath of hosting an Olympics.
Fend off the slowing global economy and the effects it could have on the Japanese markets.
Abe further honed is deal-making skills with Japan signing a trade deal with the US just 9 months after negotiations had begun. The ratified deal coming into action on January 1st, 2020 was seen as a great success and an avoidance of a potential trade war. However, it wasn’t met with universal praise as opposition parties attacked the deal saying “Japan has been defeated” and “an unequal treaty for the Reiwa era”.
USDJPY (108.73) has been rising from the middle of its 1Y range (105-112) for the last three months. Japanese Finance Minister Taro Aso said on Tuesday he was monitoring currency moves "with a sense of urgency".
EUR USD GBP
Trump takes a trip across the pond for Nato summit, only to come home early
President Trump’s most recent visit to the UK for NATO’s’ 70th-anniversary summit provided the perfect world stage for a foreign policy victory, or so he hoped. Trump’s aim was to continue plugging the narrative that there were those who weren’t paying their way in NATO and subsequently pressuring these allies into contributing more toward the running costs. However, in reality, the President endured a difficult trip which culminated in him leaving the summit earlier than planned.
What made the highlight reel?
Trump’s clashed with Emanuel Macron about “very nasty” and “very disrespectful” comments after the French president called NATO “brain dead”.
Canada’s PM Justin Trudeau appearing to mock the president in an embarrassing video.
The US president canceling his fourth and final press conference.
The trip seemed to have not provided the triumphant victory that Trump had hoped to take back to the States with him. Especially considering the House’s decision to draft impeachment articles in the wake of the recent hearings topped off a difficult week.
EURUSD is bouncing off a 1.11 resistance level after a yearlong slow decline to 1.16. Poor news in both the US (payroll, mfg, construction) and slightly better news in the EU (German industrial orders fell precipitously, but mfg in the EU is up).
GBPUSD is up almost 2% against the USD this week in spite of soft macroeconomic indicators and expected strong US jobs report. It's likely that recent poll results giving Conservatives the lead over Labor is partly responsible. The run-up to next week's election will inject more volatility.
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Saudi Arabia laying down the law at OPEC meeting
Saudi Arabia has turned up the heat ahead of the Organisation of the Petroleum Exporting Countries (OPEC) meeting in Vienna, by issuing an ultimatum to countries over-producing and subsequently driving down the price of crude oil. Oil saw a boost yesterday on the back of this hardline approach after the Kingdom stated that it will boost its own production to meet quota and stop making their deeper cuts if others like countries don’t fall in line.
What would happen if Saudi Arabia followed through on their threat?
No doubt punish the cheaters with lower crude oil prices, the likes of Iran, Nigeria...etc.
It could negatively affect the Saudi state-owned Aramco’s upcoming IPO, which will debut later this month and is relying on a high oil price.
Spur more production from the United States.
However, if the threat is successful then Saudi Arabia could back a further quota cut of 400,000bpd. Thursday saw a boost to discussions when Russian Energy Minister Alexander Novak stated that a panel of allies and OPEC nations had recommended an increase to the cut which would equal 1.7% of global supply. This further cut would only come into effect if all participants lower their quota, something that has been difficult to achieve thus far.
Many OPEC countries’ currencies are pegged to the USD (Saudi Arabia, UAE, Qatar). The other major oil-producing countries (CAD, RUB) are neither members of OPEC or pegged. RUB has strengthened most of 2019, likely on its high yields (10 yr bonds = 7.43%), rather than oil prices (which makes up 30% of the Russian economy). US sanctions have evidently not been tough enough to scare investors away.
CAD has remained in a fixed but somewhat volatile (1.5%/mo) channel for most of 2019. As oil represents only 3% of Canada’s GDP, movement in oil will not have significant leverage on the currency by itself.
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In Other News
Currency Heat Map
Below is the heat map for the first week in December, showing the relative volatility between currencies. The redder the color, the higher the volatility.
This week, ZAR, BRL and COP exhibit the highest volatility. ZAR vol is high on lowered credit ratings and massive unemployment. COP (Columbian peso) is suffering from continued high inflation. CLP (Chilean peso) actually exhibits even higher volatility than these three currencies, driven by massive protests that began with a simple hike in metro fares but have become deadly, with 26 dead so far.
CLP volatility is so high that it would mask the effects of the other currencies, and so has been deleted from this week's heat map.
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