The Week Ahead: Bridge to Nowhere

Foreign Exchange: The Week Ahead
Bridge to Nowhere
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Andrew Kositkun
Andrew Kositkun
Foreign Exchange Analyst
As the markets get settled into a new month and move ever closer to the deadline for a Brexit deal, it seems that GBP price action is becoming increasingly tied to headlines and less to fundamental changes.  While volatility in the currency has picked up as markets react to news reports from the EU, the UK, negotiators and so forth, there doesn't appear to be any material progress made on an actual deal. 

Many of the same issues remain.  The Irish border dilemma remains unresolved with the EU insisting on a Northern Ireland backstop and PM May steadfastly stating that a backstop is a nonstarter.  Alternatively, the UK has proposed a Chequers plan, but the EU has been steadfast against it and going as far as calling it suicide.  End of the day, the Brexit train is running on a circular track unless one of the sides drops a "red line."  Looking at past EU negotiations, this appears to happen only when market or time pressure plays a role. 

Ultimately, we still believe a deal will be struck if for no other reason than it would be too costly to have an actual "no deal" Brexit.  The danger is that games of brinksmanship (rhetoric on both sides have ramped up) can not only result in bitter ends, but they also rarely end quickly.  Without market or time pressure, neither side has an incentive to budge, meaning for the time being, we are in for a longer ride on the bridge to nowhere.


10/1 Australia Expectations for rates to remain unchanged at 1.50%
10/2 Romania Expectations for rates to remain unchanged at 2.50%
10/3 Poland Expectations for rates to remain unchanged at 1.50%
10/4 Mexico Expectations for rates to remain unchanged at 7.75%
10/5 India Expectations for rates to rise by 25 bps to 6.75%


United States and Canada

10/1 ISM Manufacturing Expectations for a decline from 61.3 to 60.0
10/4 Factory Orders Expectations for a gain of 1.50% following a -0.8%
10/5 Trade Balance Expectations for an increase in the deficit to $52.2 B
10/5 Jobs Report Expectations for a gain of 185k; UR drops to 3.8%
10/5 Canada Trade Report Expectations for a small trade deficit
10/5 Canada Jobs Report Expectations for a small gain in jobs; UR drops to 5.9%


10/1 Japan PMI Composite Expectations for a print near 52.0; near last months
10/3 Aussie Trade Balance Expectations for another strong trade surplus
10/4 Aussie Retail Sales Expectations for a gain of 0.3% after 0.0%

Asia/Japan, and New Zealand

10/2 Japan PMI Composite Expectations for a print near 52.0; near last months
10/3 Aussie Trade Balance Expectations for another strong trade surplus
10/4 Aussie Retail Sales Expectations for a gain of 0.3% after 0.0%



The EUR gave back all its monthly gains this past week as a combination of a Fed rate hike, implementation of new tariffs and renewed concerns about Italy's fiscal budget pushed the euro lower.  Expect the euro to remain pressured as the market learns more details surrounding Italy's fiscal budget.  Expect further consolidation with a bias downwards.  


The GBP continued its slide which started two weeks ago with PM May indicating Brexit talks were at an impasse. This was followed up by negative economic data this past week.  Brexit headlines continue to cause trauma for both bulls and bears as the market anticipates a soft or hard Brexit. Expect further consolidation this week with GBP mirroring euro price action.  


The JPY has been weakening over the past two weeks against the U.S. dollar and other cross rate currencies. An improving emerging market tone along with higher US interest rates has caused a squeeze in this safe haven currency.  Expect rising US rates to pull the USDJPY along with it.  Notably, USDJPY has broken through the sticky 113/$ level on the interbank market.


Despite no apparent progress regarding the NAFTA negotiations, and the CAD weakening during the middle of the week, the CAD recovered to finish the week relatively flat as GDP data came in stronger than expected.  Expect further consolidation.


China is out this week for its Golden Week holiday.  


The AUD continued its appreciation this past week along with many other commodity-linked currencies primarily due to an improving tone in emerging markets combined with rising commodity prices.  The RBA is expected to remain on hold.  Expect further consolidation.
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