The Week Ahead: Only Time Will Tell

Foreign Exchange - The Week Ahead
Only Time Will Tell
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Andrew Kositkun
Andrew Kositkun
Foreign Exchange Analyst
On a year to date basis, the Japanese yen has been one of the top G10 performing currencies while simultaneously exhibiting the lowest level of historical volatility over the past year in the G10.
Looking forward, it is very possible that we will experience an uptick in USDJPY volatility. The November 6 US midterm elections are expected to be consequential to the US markets as the results will influence the direction of US yields. This is important to the yen as the Bank of Japan remains committed to holding its 10 year yield around zero, leaving US yields in the driver seat in determining the yen's movements.
Currently, market consensus is for a split Congress, with Democrats taking the House and Republicans holding the Senate. If this scenario plays out, expect little impact as a split Congress creates checks and balances and a bias for a continuation of the status quo—continued Fed tightening and fading of fiscal stimulus. The interesting scenarios happen when the election results differ from the central scenario.
In the case of a Republican sweep, a reduction in political uncertainty and prospects for a second wave of tax reforms should drive long term rates higher. In the case the Democrats sweep, political uncertainty is likely to elevate as the relationship between Congress and the White House become more adversarial and the prospects of a government shutdown increases.
From a purely historical point of view, there is a tendency for USDJPY to rise after the US midterms, but this certainly doesn't happen every time as details clearly matter. Point being, keep an eye on US polls for hints as to where the yen is headed.
Major Central Bank Activity This Week
10/22 Indonesia Expectations for rates to remain unchanged at 5.75%
10/24 Sweden Expectations for rates to remain unchanged at -0.50%
10/24 Canada Expectations for rates to rise by 25 bps to 1.75%
10/25 Norway Expectations for rates to remain unchanged at 0.75%
10/25 Turkey Expectations for rates to remain unchanged at 24.00%
10/25 ECB Expectations for rates to remain unchanged at 0.00%
10/26 Russia Expectations for rates to remain unchanged at 7.50%
Key Market Moving Economic Releases
United States and Canada
10/24 Manufacturing PMI Expectations for a decline from 55.6 to 55.3
10/24 New Home Sales Expectations for a gain of 625k after a gain of 629k
10/25 Durable Goods Orders Expectations for a decline of 1.0% after a gain of 4.4%
10/26 Q3 GDP Expectations for a gain of 3.4% after a 4.2% gain
10/24 EZ Manufacturing PMI Expectations for a slight decline from 53.2 to 53.0
10/24 German Comp. PMI Expectations for a slight decline from 55.0 to 54.8
10/25 German IFO Biz. Surv. Expectations for a decline from 103.7 to 103.1
Asia/China and Japan
10/25 Tokyo CPI Expectations for YoY inflation to rise from 1.3% to 1.5%
10/24 New Zealand Expectations for another large trade deficit
The EUR continues to be trapped in an endless rotation of bullish and bearish minicycles interspersed between periods of consolidation going back to May. Potential EC – Italian budget confrontations have provided near term concerns causing euro weakness and remain a volatile component for the markets. The ECB meeting next week could be important; otherwise, expect further consolidation and sideways trading for now.
The GBP too continues to mirror much of the movement of the euro colored strongly by news headlines related to the Brexit negotiations. The market seems to be pricing an eventual deal with the EC but PM May will have to face further hurdles in getting the Tory party and Parliament to sign off on any final Brexit negotiation. Expect further consolidation ahead.
The JPY remains difficult to forecast as the market shifts ground very quickly over a wide variety of variables. One week, rising U.S. interest rates causes JPY weakness followed immediately by U.S. equities collapsing sending the market into risk-off mode causing the JPY to strengthen. Expect more volatile times ahead.
The CAD continues to reflect the most recent news cycles and vacillates back and forth between periods of strength and weakness. Rising oil prices and the USMCA help to boost sentiment, but most recently, the CAD has been weakening due to weak Canadian economic data. The Bank of Canada meets this weeks and is expected to raise interest rates by 25 bps…language in the post-meeting commentary will be important for the near term direction.
The CNY has stabilized but remains vulnerable to further weakness. U.S. – China trade negotiations are non-existent and tensions remain high as both sides remain extremely dug in. Continue to expect a steady to weaker CNH as this negotiation appears to be more than just a trade dispute but more about geopolitics and China's place as a rival to the U.S.
The AUD remains weak and continues to be in a downtrend channel since January's peak near $0.8100. There are ongoing concerns about weaker demand for Aussie commodity exports from a Chinese economy that is starting to feel the impact of tariffs has the market concerned. The Reserve Bank of Australia remains clearly on hold as uncertain times lie ahead. Expect a steady to weaker Aussie in the near term.
Five-Day Change in the Value of Major Currencies
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