The Week Ahead: Factors for the Future

Factors for the Future Share this story: Andrew Kositkun Foreign Exchange Analyst Weekends are always a good thing.  This is especially true this week as it provides a much needed break for market participants from last week's risk off trading.  However markets participants should buckle up as the calendar is setting up for further volatility.  Italian debt issues, which have faded a bit to the background, still remain alive and well.  Based on history, EU negotiations on issues such as Italy's fiscal policy tend to be a slow burning affair with flashpoints along the way.  October 15 represents the next such flashpoint as the European Commission will publish its response to Italy's proposal.  From all indications, the expectation will be for a negative assessment which would naturally drive a flare up in Rome-Brussels rhetoric.    In England, the Brexit mood has progressively improved as headlines suggesting a building consensus for breakthrough have gained momentum with consensus gathering for an extension to the UK's membership in the customs union.  If enough progress is made at the EU summit next week, look for an emergency November summit to be scheduled.  However, a healthy dose of caution is advisable.  Relatively speaking, striking a deal with the EU may be the easy part.  PM May is facing an increasingly fractured party and Parliament back home making Parliamentary math a key sticking point in her ability to get a Withdrawal Agreement finalized, i.e. even in the event of an UK/EU agreement, there's still much to go. Finally, there is the issue of the US Treasury and its semi-annual report on trading partners.  With US protectionist policies serving as the backdrop, expect US trade balances—specifically with China--to be a focus.  The US Treasury uses 3 measures to assess currency manipulation and a country doesn't have to meet all three criteria to be labelled a manipulator.  For context, as of the last report, China met 1 measure and Germany, Japan and Korea met 2 of the 3 measures.  Currently, the markets aren't expecting the US to tag China, but it's not over until it's over.  MAJOR CENTRAL BANK ACTIVITY THIS WEEK 10/16 Hungary Expectations for rates to remain unchanged at 0.90% 10/17 South Korea Expectations for rates to remain unchanged at 1.50% KEY MARKET MOVING ECONOMIC RELEASES United States and Canada 10/15 Retail Sales Expectations for gains of near 0.7% after a 0.1% gain 10/16 Indust. Production Expectations for a gain of 0.2% after a gain of 0.4% 10/17 Housing Starts Expectations for starts to decline from 1282k to 1210k 10/19 Existing Home Sales Expectations for a slight improvement in the deficit 10/19 Canada CPI Expectations for a gain of 0.1%; YoY drops to 2.7% Europe/Eurozone 10/17 EZ CPI Expectations for a gain of 0.9%; YoY at 2.1% 10/16 German ZEW Survey Expectations for a decline from 76.0 to 74.3 10/16 U.K. Jobs Report Expectations for a small gain in jobs; UR at 4.0% 10/17 U.K. CPI Expectations for a gain of 0.2%; YoY drops to 2.6% Asia/Japan, and New Zealand 10/15 China PPI and CPI Expectations for YoY at 3.6% and 2.5% respectively 10/18 China Q3 GDP Expectations for a slight decline from 6.7% to 6.6% 10/18 China Indust. Product. Expectations for a slight decline from 6.1% to 6.0% 10/17 Japan Trade and CA Expectations for another set of surpluses 10/18 Japan CPI Expectations for YoY inflation to remain at 1.3% 10/17 Aussie Jobs Report Expectations for a gain of 15k; UR remains at 5.3% FORECASTS EUR The euro finished the week marginally stronger as risk off trading saw equities and US yields fall.  Expect further volatility as markets adjust to higher yields and the associated uncertainty.  Italian budget concerns remain a drag on the euro and should remain a point of market focus.  Headline risks come through German elections and next week's European summit meeting where contentious issues will be discussed.  Expect the euro to be pushed and pulled by US yields, Brexit and Italian headlines with a bias toward a weaker euro. GBP The GBP has largely mirrored the euro's performance against the US dollar over the past week but has clearly outperformed the euro over the past month.  Continued headlines about the Brexit negotiations and PM May's standing within the Tory party continue to cause volatility and uncertainty.  Assuming a withdrawal agreement, there still remains parliamentary approval and the more contentious agreement on the relationship between the EU and UK.  Expect the GBP to remain pressured.  JPY The JPY reversed course this week and was the best performing G10 currency as US yields pulled back.  Flow wise, Japanese investors turned into net sellers of foreign bonds after 6 consecutive weeks of net buying.  Trade war tensions eased a bit after confirmation of a Trump-Xi meeting next week as well as rumors that the US won't label China a currency manipulator.  However, anxieties about a US – Japanese summit concerning Japan's persistent trade surplus with the US remain and continue to hurt. CAD The CAD was the worst performing G10 currency during the light week for data and has given up nearly all of its post USMCA gains.  The Bank of Canada's Business Outlook Survey is the next big data point as it provides insights into the central bank's thinking as it heads towards its October meeting.  While the USMCA agreement removed uncertainty surrounding the US and Canada, it hasn't materially changed BoC rate probabilities.  Expect sideways trading this week.  CNY The CNY found itself on the back foot again this week as a cut in the RRR simultaneously provided support as well as renewed concerns over a slowing domestic economy.  Reports that the US won't name China a currency manipulator as well as a scheduled meeting between Xi and Trump provided some relief.  However, the White House did announce plans to review foreign investments in technology—something clearly targeted at China.  Notably, the Chinese central bank allowed the CNY to weaken below its mid-2017 low, which was previously seen as a line in the sand.  Expect the CNY to remain pressured. AUD The AUD and NZD continue to mirror the ongoing concerns about a Chinese economic slowdown and the potential ripple effect of downsized supply chains and reduced demand for imports by China. In addition, US interest rate differentials have surged in favor of the US dollar adding more downside pressure as the RBA is expected to be on hold for the foreseeable future.  Expect some consolidation with bias toward weakness. If we can help you with any Foreign Exchange needs, please email foreignexchange@cnb.com or call (800) 447‑4133. Want to learn more about international finance, economics, and global events? Sign up for our other Foreign Exchange emails and videos! 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