Archive for Economics & Fundamentals

Have iPhone sales become the modern indicator for global economic growth?

Article by ForexTime

The recovery in U.S. stocks from October’s slump evaporated on Monday with the Dow Jones Industrial Average falling more than 600 points, while the Nasdaq Composite and S&P 500 declined 2.78% and 1.97% respectively. Apple led the sharp selloff after Lumentum Holdings, a key supplier to Apple’s iPhone, said one of its largest customers asked to reduce material shipments for previously placed orders. Although Lumentum, the optical equipment maker did not name the firm, investors jumped to the conclusion that Apple is the company which requested to reduce its shipments, supporting views that iPhone sales are beginning to experience a declining trend.

Such news should have only affected specific businesses and sectors, but instead, 414 out of the 504 companies on the S&P 500 declined on Monday, with only the defensive sectors managing to end the day in green. Markets in Asia followed Wall Street benchmarks lower today with Japan’s Topix and Nikkei leading the decliners tumbling more than 2%.

The iPhone is just a little device that costs a lot and contributes a significant chunk to U.S. GDP growth. However, when looking from a global perspective, mobile technology and services are estimated to have added $3.6 trillion or 4.5% to 2017 global GDP according to the IMF. China exported $128 billion worth of smartphones representing 5.7% of its total exports. Meanwhile in Korea, semiconductors alone accounted for 17.1% of total exports. In Ireland where Apple’s European operations are headquartered, iPhone exports are said to have amounted to a quarter of the country’s economic growth. That’s what makes the iPhone and other smartphone sales a vital indicator of global economic growth.

Adding to market anxieties are reports that the White House is circulating a draft on Auto Tariffs. This comes at a time when investors are already struggling with the U.S.-China trade tensions, Italy’s problems and Brexit talks. Given all these uncertainties, bears may continue to control the market’s direction for some time until positive news begin to flow.

In commodity markets, Brent Crude fell below $70 today after testing $71.88 yesterday.  The fall in prices comes despite OPEC agreeing on the need to cut Oil supply by around 1 million barrels per day from October’s level to prevent oversupplying the market. However, it seems -increasing supplies in the U.S., rising global inventories, and threats of a worldwide economic slowdown are having more influence on prices. Trump’s Tweet on Monday, “Hopefully, Saudi Arabia and OPEC will not be cutting Oil production. Oil prices should be much lower based on supply!” also helped drag prices lower.

The Dollar declined slightly early Tuesday but remained close to its 16-months high reached yesterday. Unless the economy experiences significant deterioration in the following weeks and months, there’s no valid justification for the Fed to end orThe recovery in U.S. stocks from October’s slump evaporated on Monday with the Dow Jones Industrial Average falling more than 600 points, while the Nasdaq Composite and S&P 500 declined 2.78% and 1.97% respectively. Apple led the sharp selloff after Lumentum Holdings, a key supplier to Apple’s iPhone, said one of its largest customers asked to reduce material shipments for previously placed orders. Although Lumentum, the optical equipment maker did not name the firm, investors jumped to the conclusion that Apple is the company which requested to reduce its shipments, supporting views that iPhone sales are beginning to experience a declining trend.

Disclaimer: The content in this article comprises personal opinions and should not be construed as containing personal and/or other investment advice and/or an offer of and/or solicitation for any transactions in financial instruments and/or a guarantee and/or prediction of future performance. ForexTime (FXTM), its affiliates, agents, directors, officers or employees do not guarantee the accuracy, validity, timeliness or completeness, of any information or data made available and assume no liability as to any loss arising from any investment based on the same.


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ForexTime Ltd (FXTM) is an award winning international online forex broker regulated by CySEC 185/12 www.forextime.com

Dollar drive to encourage renewed round of pressure for emerging markets

Article by ForexTime

The Dollar strength story has returned to the scene with a vengeance, and it represents a risk of crumbling its counterparts across the globe.

The Dollar Index has advanced to its highest level since June 2017 as trading commences for the new week, which represents a 17-month high for the Greenback and a milestone low for the likes of the Euro that has consequently declined to its lowest level since June 2017 on renewed Dollar strength.

More woes for emerging markets and the Chinese Yuan ahead?

This rally in the Greenback is going to ask a lot of questions over the resilience of its counterparts, but the largest risk that investors will probably be evaluating is what does this mean for emerging markets? Dollar strength was one of the key themes behind the prolonged weakness in emerging markets that took place over the summer, and this news over the Greenback rallying to new highs is going to bring questions over whether another round of emerging market weakness should be expected before we conclude 2018.

What will be one of the most interesting themes to monitor is whether this new round of Dollar strength is enough to push the Chinese Yuan “over the edge” and within touching distance of the psychological seven level against the USD. Dollar dynamics has been an ongoing challenge for emerging markets throughout this year, but the resilience of the Chinese Yuan to not meet 7 against the USD is seen as one of the last hurdles of defense for emerging markets before another brutal sell-off.

Basically, if this relentless drive for the Dollar persists further meaning more highs for the Greenback and if this is met with the Yuan finally breaching 7 against the Dollar we are looking at a combination for yet another round of pain for emerging markets before an already eventful 2018 concludes.

What has encouraged another rally for the Greenback? Trade tensions or Fed policy?

The other question to ask is what exactly is behind the push higher in the Greenback? Pointing the finger towards the Federal Reserve and central bank divergence regarding ambitious interest rate policy in the United States is the easy answer, but not necessarily the right one when you consider that the Fed has been consistent with its communications to raise US interest rates further for a long time. US interest rate policy in the United States has been priced into the USD a long time ago, meaning that there is likely a different culprit behind the renewed push for the USD.

I would personally attribute the move to growing skepticism over whether President Trump was sincere with his narrative that a trade deal with China might be close. While we haven’t seen any drastic changes to this narrative, we haven’t seen a continuation of this optimism either, which does suggest that this could have been a strategic ploy to put the pressure on China before the scheduled meeting at the G-20 summit in Argentina later this month.

We do overall maintain the view that a trade deal needs to be announced soon, otherwise it is very difficult to pinpoint when emerging markets can really bounce back. This means that a trade agreement is consequently needed for the Yuan, like many other emerging market assets to recover from a painful 2018.

Gold decline suggests Dollar drive driven by trade skepticism

Gold has fallen in line with the USD drive, meaning that the current rally in the Greenback is not a reflection of a safe-haven spree from traders. This does weigh in line with the view that investors are piling up bullish Dollar bets, which makes me more suspicious that this move has been encouraged by skepticism that a trade agreement with China can really be agreed in November.

Pound at risk once again to lower 1.20’s

The Pound has been another victim of a brutal day in the FX markets, but it is also suffering from a return of investor concerns over the daunting prospect of a hard-Brexit scenario.

The Pound can still fall further on hard-Brexit fears, and I would still not rule out the potential of a dive to the lower 1.20’s in the GBPUSD if the prospects over a deal between the United Kingdom and European Union being announced before year-end do deteriorate once again.

Euro could meet 1.10 before end of month 

Another currency to keep an eye on this week is the Euro. The EURUSD has fallen below 1.13 and a sustained breakdown below these levels represent a risk that the EU currency can drop to 1.11 as soon as this week.

If concerns over the budget stand-off with Italy resurface and are met with pessimistic data out of Europe that an economic slowdown can’t be avoided, concerns that the ECB will not be able to raise EU interest rates next year will arise and we will be looking at a risk of the Euro potentially dropping below 1.10 before November concludes.

Disclaimer: The content in this article comprises personal opinions and should not be construed as containing personal and/or other investment advice and/or an offer of and/or solicitation for any transactions in financial instruments and/or a guarantee and/or prediction of future performance. ForexTime (FXTM), its affiliates, agents, directors, officers or employees do not guarantee the accuracy, validity, timeliness or completeness, of any information or data made available and assume no liability as to any loss arising from any investment based on the same.


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ForexTime Ltd (FXTM) is an award winning international online forex broker regulated by CySEC 185/12 www.forextime.com

The Trade Week Ahead – One up, One down

EURAUD continues to be in my crosshairs – the breakdown of the 200-day moving average last week has continued to roll through and with the economic data due this week likely to see a dampener on the EUR and a positive on the AUD I expect the downside movement in the pair to continue.

The Economic events –

European inflation: CPI

• CPI in the EU remains flat at around 1.2% to 1.4% year on year. The ECB makes CPI out to be positive ‘enough’ to justify ending its QE programs. However, it is still an on way from its target 2% level, particularly when you look at the overall tone of EU growth.

• The ‘renaissance’ that was expected of Europe this year just hasn’t materialized, as possible negative trade issues with the US flared and the EU periphery continued to flounder. This year has also been compounded by the Italian elections and populist movements in Germany, France, and Spain threatening EU stability across the board.

• Even Germany the largest economy in the EU is flattening, and that is despite the fact its ‘engine room’ Bavaria, has seen inflation hitting around 2.4%, as the ‘perfect storm’ hits its high-end manufacturing plays (automakers) and the services sectors flatline.

Inflation, therefore, is unlikely to gap up anytime soon leaving the ECB with no choice but to continue with its high accommodative monetary policy stance.

EUR likely to weaken.

AUD – Labour booming and unemployment falling

• Labour force market is booming: over the past year Australia has added 291,000 jobs or 2.4% in the past 52 weeks, it is over 500,000 if we look back at the past 2 years. 186,000 full term jobs have been created over the year to October with over 310,000 in the 24 months to October. Come Thursdays the expected change in the labor force figures is for 20,000 jobs created according to the latest Reuters poll – AUD positive initially.

• The unemployment rate has been falling steadily since peaking in October 2014. However, that fall has begun to steepen this year as the slack in the employment market tightened. The structural 0.3% move seen this year is strong, sustained and is steepening – Thursday’s unemployment rate is forecasted to be 5.1% on a trend basis down from 5.2% according to the Reuters poll this would confirm my AUD bias in EURAUD.

• The final part of the employment puzzle is hours worked, this has been rising solidly. Increased hours is a sign that employees are working and looking to work more – it has a strong correction to wages, the increase in hours should mean an increase in wages. This is a CPI inflator, and an AUD positive.

Therefore I suspect that this week EURAUD will be one of the more interesting pairs to watch, however when trading currencies off the back of economic releases it always prudent to have stopped in place and be wary of gapping.

By FPMarkets.com

 

This week in monetary policy: Armenia, Sri Lanka, Thailand, Indonesia, Philippines, Egypt, Mexico & Jamaica

By CentralBankNews.info

    This week – November 11 through November 17 – central banks from 8 countries or jurisdictions are scheduled to decide on monetary policy: Armenia, Sri Lanka, Thailand, Indonesia, Philippines, Egypt, Mexico and Jamaica.
    Following table includes the name of the country, the date of the next policy decision, the current policy rate, the result of the last policy decision, the change in the policy rate year to date, the rate one year ago, and the country’s MSCI classification.
    The table is updated when the latest decisions are announced and can always accessed by clicking on This Week.
WEEK 45
NOV 11 – NOV 17, 2018:
COUNTRY                    DATE                      RATE                 LATEST                     YTD               1 YR AGO
ARMENIA 13-Nov 6.00% 0 0 6.00%
SRI LANKA 14-Nov 7.25% 0 0 7.25%
THAILAND 14-Nov 1.50% 0 0 1.50%
INDONESIA 15-Nov 5.75% 0 150 4.25%
PHILIPPINES  15-Nov 4.50% 50 150 3.00%
EGYPT 15-Nov 16.75% 0 -200 18.75%
MEXICO 15-Nov 7.75% 0 50 7.00%
JAMAICA 16-Nov 2.00% 0 -125 3.25%

Mauritius maintains rate, 2019 inflation, growth forecast

By CentralBankNews.info
      The central bank of Mauritius, the Indian Ocean island, left its benchmark repurchase rate steady at 3.50 percent as it lowered its 2018 estimate of inflation further while maintaining the outlook for inflation next year.
      The Bank of Mauritius (BOM), which has kept its rate steady since cutting it in September 2017, projected that 2018 inflation would average 3.2 percent, down from the August forecast of 3.5 percent and May’s forecast of 4.2 percent. Inflation in 2017 averaged 3.7 percent.
      After rising to 7.0 percent in February, inflation in Mauritius decelerated sharply to 1.0 percent by June as shocks to food prices subsided and some administered prices fell. Since then inflation has picked up speed and rose to 2.8 percent in October from 1.9 percent in September.
     Barring major shocks to supply, BOM forecast 2019 inflation of 3.0 percent, as in August.
     The economy of Mauritius has slowed in recent quarters but BOM left unchanged its forecast for growth to average 4.0 percent this year and next year, up from 3.5 percent in 2017, supported by rising consumption and public infrastructure investment.
     Year-on-year Mauritius’ gross domestic product grew 3.7 percent in the second quarter, down from 4.1 percent in the first quarter.
      “The MPX weighted the risks to growth and inflation outlook and concurred that monetary conditions are currently appropriate and supportive of economic growth and price stability,” BOM said.
      The Mauritian rupee has been relatively stable since June after depreciating in the first half of the year. Today the rupee was trading at 34.6 to the U.S. dollar, down 2 percent this year.

      The Bank of Mauritius issued the following statement:

“The Monetary Policy Committee (MPC) of the Bank of Mauritius (Bank) has unanimously decided to leave the Key Repo Rate (KRR) unchanged at 3.50 per cent per annum at its meeting today.
The MPC noted that, since its August 2018 meeting, there has been a downgrading of global growth forecasts. In its October 2018 World Economic Outlook, the IMF has revised down its growth projections for both 2018 and 2019 by 0.2 percentage point to 3.7 per cent, reflecting mainly global economic uncertainties. The forecast of global inflation has been revised up to 3.8 per cent in 2018 and 2019. 
Domestically, headline inflation is projected at around 3.2 per cent in 2018 compared to 3.7 per cent in 2017. The Bank forecasts an inflation rate of 3.0 per cent for 2019, barring major supply shocks. 
The Bank maintains real GDP growth at 4.0 per cent for 2018 on account of stronger economic activity in key sectors of the economy. Higher consumption expenditure and public infrastructure investment are supporting the growth momentum. For 2019, real GDP is expected to grow by 4.0 per cent. The unemployment rate is estimated to decline to 6.9 per cent in 2018.  
The MPC discussed extensively the level of excess liquidity and noted that short-term interest rates continue to be around the KRR following the implementation of appropriate measures. 
The MPC weighed the risks to growth and inflation outlook and concurred that monetary conditions are currently appropriate and supportive of economic growth and price stability. 
The MPC will issue the Minutes of its meeting on Friday 23 November 2018.”

Fed commitment to higher rates supports Greenback; Be careful of GBP profit-taking

Article by ForexTime

Reinforced expectations over higher interest rates in the United States after the Federal Reserve provided a consistent narrative that policymakers remain committed to “further gradual” rate hikes in the latest monetary policy statement has provided the needed catalyst to support the Dollar. The Greenback is trending higher against the majority of its counterparts in the early hours of Friday at time of writing, including all of the G10 except for the Japanese Yen unchanged or higher against all of the currencies in EMEA except for marginal gains in the Russian Ruble and all of the Asian basket minus the Yen and Indian Rupee.

There are no major surprises from the Federal Reserve decision to be honest because everyone expected interest rates to be unchanged in November, but investors wanted the necessary guidance that the central bank remains committed to the same path of monetary policy that they are expecting until the end of 2019. This is what they received.

What was arguably the most interesting takeaway from the Fed statement is the lack of acknowledgement shown from the central bank regarding the recent levels of global market volatility, which suggests to investors the resilience of the Fed to maintain on course with interest rate hike ambitions.

As we move forward and digest the policy statement further, it wouldn’t be a major surprise to see the central bank divergence story returning to the attention of traders.

This is a possible reason behind the negative momentum seen in stock markets in Asia overnight, despite the initial thoughts that concerns over global growth slowing down and what a potential decline in Chinese economic momentum might possibly mean to the world economy. I would personally put the downturn in stock momentum down to concerns about higher interest rate policy in the United States, and the return of the divergence in central bank story.

Away from the aftermath of the latest FOMC statement, the British Pound is going to attract the attention of international investors as we wrap up the trading week.

The near 2% rally in the British Pound month-to-date rightfully suggests that investors are becoming confident that a Brexit agreement is close to being announced. The theme of a soon-to-be announced Brexit agreement is something that is gaining further steam across media.

I would however point out that this news is getting close to being “priced” into the Pound and potential profit-taking is a risk investor’s need to access.

Source: Bloomberg Terminal

Source: Bloomberg Terminal

Source: Bloomberg Terminal

Disclaimer: The content in this article comprises personal opinions and should not be construed as containing personal and/or other investment advice and/or an offer of and/or solicitation for any transactions in financial instruments and/or a guarantee and/or prediction of future performance. ForexTime (FXTM), its affiliates, agents, directors, officers or employees do not guarantee the accuracy, validity, timeliness or completeness, of any information or data made available and assume no liability as to any loss arising from any investment based on the same.


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ForexTime Ltd (FXTM) is an award winning international online forex broker regulated by CySEC 185/12 www.forextime.com

US Fed holds rate as growth in fixed investment easing

By CentralBankNews.info
     The U.S. Federal Reserve left its benchmark federal funds rate steady at 2.0 – 2.25 percent, as widely expected, but said growth of fixed investments by businesses, such as machinery or technology, had moderated from its rapid pace earlier in the year.
      But the Fed’s policy-making arm, the Federal Open Market Committee (FOMC), generally reiterated its view from September about the current strength of the U.S economy, where the labor market had “continued to strengthen and that economic activity has been rising at a strong pace.”
     As in recent months, the FOMC also said it expects further gradual increases in the fed funds rate to be consistent with sustained economic expansion and inflation near its 2.0 percent objective.
     “Risks to the economic outlook appear roughly balanced,” an unanimous FOMC said, as in September.
     Today’s statement by the Fed did not include any update to its economic forecast from September when the fed funds rate was seen averaging 2.4 percent this year, implying one more rate hike, with economists looking for this hike to come at the Fed’s meeting in December.
      The Fed has already raised its rate three times this year by a total of 75 basis points and 8 times since it began tightening its policy in December 2015.
     

 
       The Board of Governors of the Federal Reserve System issued the following statement:

“Information received since the Federal Open Market Committee met in September indicates that the labor market has continued to strengthen and that economic activity has been rising at a strong rate. Job gains have been strong, on average, in recent months, and the unemployment rate has declined. Household spending has continued to grow strongly, while growth of business fixed investment has moderated from its rapid pace earlier in the year. On a 12-month basis, both overall inflation and inflation for items other than food and energy remain near 2 percent. Indicators of longer-term inflation expectations are little changed, on balance.
Consistent with its statutory mandate, the Committee seeks to foster maximum employment and price stability. The Committee expects that further gradual increases in the target range for the federal funds rate will be consistent with sustained expansion of economic activity, strong labor market conditions, and inflation near the Committee’s symmetric 2 percent objective over the medium term. Risks to the economic outlook appear roughly balanced.
In view of realized and expected labor market conditions and inflation, the Committee decided to maintain the target range for the federal funds rate at 2 to 2-1/4 percent.
In determining the timing and size of future adjustments to the target range for the federal funds rate, the Committee will assess realized and expected economic conditions relative to its maximum employment objective and its symmetric 2 percent inflation objective. This assessment will take into account a wide range of information, including measures of labor market conditions, indicators of inflation pressures and inflation expectations, and readings on financial and international developments.
Voting for the FOMC monetary policy action were: Jerome H. Powell, Chairman; John C. Williams, Vice Chairman; Thomas I. Barkin; Raphael W. Bostic; Lael Brainard; Richard H. Clarida; Mary C. Daly; Loretta J. Mester; and Randal K. Quarles.”

     www.CentralBankNews.info

Risk assets boosted by divided Congress; dollar awaits Fed meeting

Article by ForexTime

Asian stocks followed Wall Street higher after U.S. mid-term elections produced a divided Congress on Wednesday. All major U.S. indices climbed more than 2% yesterday, with the Healthcare and Technology sectors leading the rally. Although a divided Congress will make it tougher for President Trump to pass new bills over the next two years, the market’s initial reaction suggests that investors do not expect any reversal of previously enacted legislation.  However, there’s still a high chance to get some middle-class tax cuts as Democrat opposition to them will increase the probability of another four-year term for President Trump in 2020.

This explains why U.S. 10-year Treasury yields rallied after an initial decline of 8 basis points. Ten-year yields have returned to levels where the markets crashed in early October. However, the CBOE’s volatility index declined 17% yesterday in a sign that investors are less worried about the latest spike in interest rates. It will be very interesting to find out what levels of the 10-year bonds will scare the markets again, and I don’t think we are too far away from it. Breaking above 3.25% again will likely bring in some anxiety, but above 3.5% may leave many investors to consider a heavy rotation from equities to fixed income.

The recovery in U.S. Treasury yields also helped the dollar bounce back after touching a 2.5 week low. The Dollar’s index fell to 95.68, but gradually appreciated throughout the day and is trading at 96.20 at the time of writing. Traders focus will now shift to the Federal Reserve which will conclude its two-day policy meeting. While no rates hikes are expected to take place today, the tone of the statement is what matters. Last week’s employment report showed the economy remained on a solid footing with jobs increasing by 250,000 and wage growth reaching a near decade high. However, the housing market started showing signs of cracks, consumer spending slowed, and business investment decelerated. So, expect the statement to reveal a more dovish than hawkish tilt.

In commodity markets, Oil came under pressure as rising U.S. production and inventories outweighed talks of OPEC production cuts. The Energy Information Administration reported that Oil production will surge towards 12 million barrels-per-day by mid next year. Meanwhile, crude and gasoline inventories rose more than expected in the week ending November 2. Although China’s October crude imports hit a record of 9.61 million barrels-per-day in October, this trend is not likely to continue given the latest signs of economic weakness. So expect to see more willingness from OPEC and friends to cut production again to keep prices supported above $70.

Disclaimer: The content in this article comprises personal opinions and should not be construed as containing personal and/or other investment advice and/or an offer of and/or solicitation for any transactions in financial instruments and/or a guarantee and/or prediction of future performance. ForexTime (FXTM), its affiliates, agents, directors, officers or employees do not guarantee the accuracy, validity, timeliness or completeness, of any information or data made available and assume no liability as to any loss arising from any investment based on the same.


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ForexTime Ltd (FXTM) is an award winning international online forex broker regulated by CySEC 185/12 www.forextime.com

Rand rallies on improved risk appetite; USD softens further after mid-terms

Article by ForexTime

Financial markets are continuing their forward drive on the realization that investors were rightly positioned for the outcome of the mid-term elections in the United States. A number of stock markets are trending higher on improved risk appetite, while the South African Rand has been a noticeable mover following gains above 1% at time of writing. The Rand is generally used as a proxy for evaluating investor appetite towards risk.

One of the more interesting trends to have monitored in the aftermath of the mid-term results is the acceleration in near-term Dollar weakness. This suggests that investors are descaling away from heavy USD buying positions and have potentially been put off holding onto their positions because of the consensus that the Liberal Democrats taking control of the House provides a potential roadblock to President Trump introducing further fiscal stimulus.

Softness in the Greenback is something that will be warmly welcomed from different currencies across the globe. The Indonesian Rupiah, which has been crushed to its weakest levels since the 1997 Asian Financial Crisis due to the emerging market rout in recent months has rallied over 1.4% in the past day, and has gained as much as 2.65% this week. At time of writing, only the Offshore Chinese Renminbi and Japanese Yen are marginally lower against the USD this week, with this generally suggesting that investors are gradually dipping back into buying emerging market currencies at weak valuations.

This trend of Dollar softness has also been noted across the EMEA this week with only the Turkish Lira showing weakness against the Greenback at 0.66% since Monday. It should be taken into account that the weakness in the Turkish Lira could also be a reflection of profit-taking on the Lira after the currency benefited from a rally by as much as 13% quarter-to-date. The Turkish Lira is actually trading reasonably close to its pre-historic crisis levels seen in early August, which means the Lira has rallied nearly 20% since August 10, and I think it is fair to say that this would have been unheard of given how seriously worried investors were about the events around Turkey back in the summer.

The British Pound has advanced to its highest level in approximately three weeks as the Sterling benefits from weakness in the Dollar and hopes of a Brexit agreement being close at last.

As we wrap into the final half of trading for the week the mid-term election outcome should fade away from investors’ radar, with financial markets instead reverting attention to the guidance provided from the Federal Reserve after their latest policy meeting and any upcoming announcements on the direction of trade talks between the United States and China.

The upcoming OPEC meeting in Abu Dhabi this coming weekend is another event that investors should be preparing for, especially given the headlines that have circulated over the past few hours that OPEC and its allies are discussing possible oil output cuts in 2019.

Disclaimer: The content in this article comprises personal opinions and should not be construed as containing personal and/or other investment advice and/or an offer of and/or solicitation for any transactions in financial instruments and/or a guarantee and/or prediction of future performance. ForexTime (FXTM), its affiliates, agents, directors, officers or employees do not guarantee the accuracy, validity, timeliness or completeness, of any information or data made available and assume no liability as to any loss arising from any investment based on the same.


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ForexTime Ltd (FXTM) is an award winning international online forex broker regulated by CySEC 185/12 www.forextime.com

Iceland raises rate 25 bps as inflation expectations rise

By CentralBankNews.info
     Iceland’s central bank raised its key interest rate, the rate on 7-day term deposits, by 25 basis points to 4.50 percent and warned “if inflation expectations continue to rise and remain persistently at a level above the target, it will call for a tighter monetary stance.”
     It is the first rate  hike by the Central Bank of Iceland (CBI) since November 2015 and the first change in rates since a 150-basis-point easing cycle from August 2016 concluded with a 25-point cut in October 2017.
     Today’s rate increase comes after the CBI in June began warning of the need for tighter monetary policy in light of rapid economic growth and wage pressures.
     In its October policy statement the bank’s monetary policy committee then warned rates would rise if inflation expectations continued to rise and remain above the bank’s target of 2.5 percent.
     “GDP growth in 2017 and H1/2018 was stronger than previously estimated,” CBI said, raising its growth forecast for 2018 to 4.4 percent from an earlier 3.6 percent although growth is expected to slow down and help close the output gap.
     For 2019 CBI retained its forecast for economic growth of 2.7 percent, then lowered the 2020 forecast to 2.5 percent from an earlier 3.0 percent, and forecast 2.6 percent growth in 2021.
     Iceland’s economy has enjoyed an economic boom in recent years, it grew 4.0 percent last year, boosted by a surge in tourism.
      Iceland’s gross domestic product expanded by an annual 7.2 percent in the second quarter of this year, up from 5.6 percent in the first quarter while inflation rose to 2.8 percent in October from 2.7 percent in September, boosted by higher import prices from a lower exchange rate of the krona and higher oil prices.
     “The outlook is for inflation to continue rising and be somewhat above the target next year,” CBI said, adding inflation expectations have risen recently and now above target.
     In its latest monetary bulletin, CBI maintained its forecast for headline inflation this year to average 2.7 percent, up from 1.8 percent last year, but raised the forecast for 2019 inflation to 3.4 percent from an earlier 2.8 percent as unit labour cost rise 5.3 percent after a 5.6 percent rise in 2018.
     In 2020 inflation is seen averaging 2.7 percent and then easing to CBI’s 2.5 percent target in 2021.
     After rising sharply from March 2015 to June 2017, Iceland’s krona has weakened this year and is now 8 percent weaker than CBI projected in its previous forecast from August and at its lowest level in more than two years as export growth has slowed and investors have turned more pessimistic.
      The CBI expects the exchange rate to remain broadly at its year-to-date average for the next two years, or a trade-weighted exchange rate index about 3 percent lower in 2018 than in 2017. For 2019 a further 3 percent decline in expected.
     Today the krona firmed in response to the rate hike and was trading at 120.4 to the U.S. dollar, down 14 percent this year.

     The Central Bank of Iceland issued the following statement:
   

“The Monetary Policy Committee (MPC) of the Central Bank of Iceland has decided to raise the Bank’s interest rates by 0.25 percentage points. The Bank’s key interest rate – the rate on seven-day term deposits – will therefore be 4.5%. 
GDP growth in 2017 and H1/2018 was stronger than previously estimated. Even though growth is expected to slow down in H2, it is forecast at 4.4% for 2018 as a whole, according to the November Monetary Bulletin. This is nearly 1 percentage point more than the Bank forecast in August. GDP growth is projected to ease in the coming term and the positive output gap is expected to close.
Inflation measured 2.8% in October. The difference between measures of inflation including and excluding housing is close to its smallest in over four years. The year-on-year rise in house prices continues to ease, but this is offset by a sizeable increase in import prices in the recent term. This partly reflects the rise in global oil prices, although the króna has also depreciated since August. 
The outlook is for inflation to continue rising and be somewhat above the target next year. In addition, inflation expectations have risen recently and are now above target by all measures. The inflation outlook has therefore deteriorated, but on the other hand, the outlook is for growth in economic activity to ease faster than previously expected. 
Higher inflation and inflation expectations in recent months have lowered the Central Bank’s real rate more than is desirable in view of current economic developments and prospects. As a result, it is necessary to raise the Bank’s key rate now. 
The near-term monetary stance will depend on the interaction between a narrower output gap, wage-setting decisions, and developments in inflation and inflation expectations.
The MPC reiterates that it has both the will and the tools necessary to keep inflation at target over the long term. If inflation expectations continue to rise and remain persistently at a level above the target, it will call for a tighter monetary stance. Other decisions, particularly those relating to the labour market and fiscal policy, will then affect the sacrifice cost in terms of lower employment.”