Can you believe we’re already into the last trading quarter of the year?
If you’re looking to make your last-minute pips like we are, then you’ll want to take a look at these economic themes that might move the major currencies in the last months of the year:
Italy’s budget drama
ICYMI, Italian officials recently rolled out their 2019 budget plans, which targets a budget deficit equivalent to 2.4% of Italy’s GDP. BFD, since 2.4% is larger than the Finance Minister’s suggested 1.6% target and the previous administration’s 0.8% goal.
More importantly, the ambitious plan would pit the populist, anti-establishment officials against the EU.
Brussels would want to maintain the integrity of its international spending limits, while the Italian government would want to keep major campaign promises like universal basic income and tax cuts.
Italy has until October 15 to submit a full budget plan. EU Economic Affairs Commissioner Pierre Moscovici will then examine the proposal and, if he approves, then the Italian government will have until the end of the year to seal the deal.
Recall that U.K. PM Theresa May has promised that Brexit would happen with or without a deal by March 29 next year.
EU Chief Brexit negotiator Michel Barnier seems optimistic enough as he and his team work on an “orderly Brexit and a new partnership that respects the UK’s sovereignty.”
But U.K.’s Brexit Minister Dominic Raab remains unimpressed. Just yesterday he threatened that “we will be left with no choice but to leave with no deal” if the EU seeks to “punish Britain” by pushing for a “one-sided deal.”
May’s job isn’t any easier. Aside from ironing kinks on issues such as the Irish border, post-Brexit trade deals, and immigration, No. 10 must also deal with a divided party.
Hard Brexiteers believe that the last Chequers proposal cedes too much control to the EU post-Brexit. On the other hand, May’s ministers are throwing their weight behind the PM to break the negotiation impasse.
Barnier has hinted that he wants a deal by November to leave plenty of time for ratification by March. Luckily, some EU officials have pointed out that a December or even a January deal would still do.
For now, all eyes will be on the ongoing party conference to see if the members’ stance have hardened or changed ahead of the EU summit on October 18-19, the original date for agreeing a withdrawal treaty.
Crude oil updates
Oil benchmarks are flirting with their four-year highs this week as market players brace for the U.S. sanctions scheduled to hit oil-producing Iran on November 4.
Investors’ concerns center around the ability of oil producers like OPEC and Russia to replace Iran’s supply shortfall. Word around is that, at its peak, Iran’s oil industry supplied almost 3% of the world’s daily consumption.
Iran’s not the only problem, however. Oil-producing countries such as Venezuela are dealing with economic turmoil that could limit their oil exports, while OPEC isn’t feeling the pressure to raise its output in 2019.
And then there’s the demand situation. Factors such as the U.S.-China trade war and waning global demand could lead to a tighter-than-expected market that could drag prices lower in the next few months.
U.S. mid-term elections
On November 6, Americans will elect all 435 seats in the U.S. House of Representatives and 35 out of 100 seats in the Senate. Some state and local seats will also be up for grabs.
Remember that Republicans currently hold 237 seats in Congress against the Democrats’ 193 while there are five vacant positions. Only 218 seats are needed for control, though, so a flip is still possible.
The battle is not as nail-biting in the Senate. See, 24 out of the 35 seats being contested are held by Democrats while only 9 Republican seats are available.
This means that that the Dems would not only need to hold on to ALL 24 seats but also snag 2 of the 9 Republican positions to gain majority. Talk about a tall order!
This year’s results are important for Trump, who has made headways on his campaign promises regarding taxes, healthcare, and trade but has yet to really work on infrastructure and further tax reform.
If Democrats win control of the House as pollsters believe, then Trump might have to dial down plans that need Congressional backing such as additional fiscal expansion and withdrawing from the WTO.
He might then have to focus on issues where he has executive power (e.g. trade policies) and even up the informal pressure (read: tweets) on the Fed, OPEC, etc. to achieve his goals.
If the Republicans end up taking control of the Congress AND the Senate, however, then we might see the Donald step up his policy game and fulfill his campaign promises in time for a second term in 2020.
Global trade updates
2018 trading wouldn’t be complete without trade war updates in the mix!
The Donald still feels that it’s “too soon” to talk trade deals with China, so it’s unlikely that we’ll see compromises on the tariffs already implemented on both sides.
Meanwhile, the U.S. recently started a bilateral “Trade Agreement on Goods” with Japan. For now, the U.S. has pinky-sworn not to impose heavy tariffs on Japan’s auto imports while TAG negotiations are underway.
The EU will likely face the most pressure if Trump’s NAFTA (sorry, USMCA) presser was any clue. In it, Trump reminded that:
“If we can’t make a deal with the European Union, we will respectfully put tariffs on cars.”
Judging by the U.S.’ deals with USMCA and Japan as well as a report commissioned by the German government hinting that the EU could plunge into a recession if a trade conflict with the U.S. were to escalate, the EU would probably end up compromising too.