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Foreign Exchange Market Update

June 17, 2019

United States (US): New York Manufacturing Activity Unexpectedly Contracts in June, Fed Meeting in Spotlight; U.S. businesses beg to be left off Trump's tariff list
 
New York Fed's Empire manufacturing activity unexpectedly contracted in June and investors cautiously awaited the Fed meeting due this week for more clues about possible reduction in interest rates. Manufacturing activity in New York took a sharp downward turn, with the index of activity in the sector showing a record monthly decline. The New York Fed said its general business conditions index plunged to a negative 8.6 in June from a positive 17.8 in May. The Fed's begins its monetary policy meeting on Tuesday, with a decision due on Wednesday. Market participants are widely expecting the Fed to drop the word "patient" from its statement, a signal that it is willing to cut interest rates in future against the backdrop of trade tensions and slowing growth in the U.S. FedWatch tool currently indicates just a 22.5% chance the Fed will cut rates this week but a 65.7% chance for a rate cut next month.
 
Hundreds of U.S. businesses from local bridal shops to multi-billion-dollar retailers have submitted comments to the U.S. Trade Representative’s Office opposing President Trump’s plan to slap tariffs on another $300 billion of Chinese imports.
 
European Union (EU): ECB's Coeure: Tiering to be Considered If Rates Have to Be Cut; Eurozone Labor Costs Growth Improves in Q1
Euro traded at 1.1232 against USD at 9:00 am PST.
 
ECB Governing Council would consider the impact of negative interest rates and the tiering system, if it had to conclude that cutting rates is the best option, ECB Executive Board Member Benoit Coeure said. A tiered deposit rate can partly reduce the burden of the cost banks pay on the cash they park at the ECB. Coeure noted that policymakers were having concerns mostly about the manufacturing sector and that the signals from the financial markets were "quite alarming". The policymaker pointed out that risks surrounding the euro area outlook has increased and in one of the future policy sessions policymakers may be having a situation where they have materialized.
 
Eurozone labor costs increased at a slightly faster pace in Q1. Hourly labor costs grew 2.4% YoY, slightly faster than the 2.3% increase seen in Q4. The two main components of labor costs are wages and salaries, and non-wage costs. In the euro area, the cost of wages and salaries per hour worked grew by 2.5% annually versus 2.3% a quarter ago.
 
Germany: GDP To Contract in Q2
 
Economy is set to contract slightly in the second quarter. Driven by investment and household spending, the economy expanded 0.4% in Q1 after staying flat a quarter ago. The central bank said temporary factors played an important role in boosting Q1 growth. Favorable weather underpinned construction investment. Exports remain weak and the downturn in the industry is likely to continue, the bank noted. Earlier this month, Bundesbank downgraded its growth outlook for 2019 to 0.6% from 1.6% and that for next year to 1.2% from 1.6%.
 
United Kingdom (UK): Labor Costs Growth Lowest Since Mid-2017; Households' Financial Wellbeing Improves
British Pound traded at 1.2562 against USD at 9:00 am PST.
 
Labor costs increased at the joint-lowest rate since mid-2017. Labor cost per hour grew 2.1% annually in Q1, before adjusting inflation. At 2%, growth was lower in the private sector than the public sector, where labor cost advanced 3.6%. Wage costs per hour increased 2.1% YoY and non-wage costs grew 1.3%. QoQ, labor cost per hour dropped 0.7%, following a large growth in the prior quarter. This was the largest decline since 2010.
 
Households' assessment of their financial well-being improved in June and their expectations turned positive for the first time since November. HFI, rose to 43.8 in June from 42.8 in May. The future HFI rose to 51.5 in June from 49.2 in May, positive expectation regarding their financial well-being for the coming year. Job security perceptions weakened for the eleventh straight month. Income from employment rose at a weaker rate, easing for the second successive month. The living costs rose at a stronger rate and inflation expectations were largely unchanged from May. The majority, 69%, of households continued to expect the next move by the BoE to be an increase within the next twelve months.
 
China: President Xi Jinping to Make First State Visit to North Korea
Onshore Chinese Yuan traded at 6.9330 per USD at 9:00 am PST and offshore Chinese Yuan traded at 6.9251 per USD.
 
President Xi Jinping will make his first state visit to North Korea, a trip seen as bolstering Beijing’s bargaining position ahead of a possible summit with the U.S. The two-day visit, which begins Thursday, would be the first by a Chinese leader to its neighbor and communist ally in 14 years. The trip falls just ahead of the Group of 20 summit in Japan next week which Mr. Xi and President Trump will attend, providing a chance for them to discuss tensions that are centered on trade but have spilled over to encompass technology and a wider rivalry between the two countries. By scheduling a summit with North Korean leader Kim Jong Un before a potential sit-down with Mr. Trump, the Chinese leader appears to be highlighting China’s influence with North Korea and the vital role Beijing could play in pressuring Pyongyang to eliminate its nuclear programs. Mr. Xi’s trip would “remind Washington that China can be very helpful in resolving the North Korean nuclear problem, especially at a moment when the US seems to have big trouble resuming official dialogue with North Korea,” said Zhao Tong, a fellow at the Carnegie-Tsinghua Center for Global Policy in Beijing.

This market update is prepared by Cathay Bank for informational purposes only and does not constitute any form of legal, tax or investment advice, nor should it be considered an assurance or guarantee of future exchange rate movements or trends. This information is provided without regard to the specific objectives, financial situations or needs of any recipient. Cathay Bank does not make any representations or warranties about the accuracy, completeness or adequacy of this market update.
 

 

 

 

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