The Week Ahead: Putting in a Bottom

Putting in a Bottom

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Andrew Kositkun Foreign Exchange Analyst

In last Sunday's The Week Ahead publication, we highlighted the expectation for an increase in short term GBP volatility and this past week certainly didn't disappoint.

After months of intense negotiations, the UK published a 585 page document outlining all the known aspects of the withdrawal agreement. Immediately after PM May announced that her cabinet supported the deal, the GBP spiked higher on increased optimism for a negotiated exit. Ultimately, the GBP ended the week lower as a string of cabinet resignations, including that of UK Brexit Secretary Dominic Raab, raised concern over a leadership challenge to PM May as well as her ability to get this deal through parliament.

Assuming PM May is able to get this deal through parliament, it should an economic positive for the UK. The deal has a provision that allows for an extension of the transition period, reducing the likelihood of an ultimate no-deal outcome. Moreover, the text includes a legally binding customs union for the EU and the UK (not just Northern Ireland). In addition the UK will have access to the preferential trade agreements with other countries. The UK has also committed to keeping its regulations closely aligned with the EU's.

While these provisions have put in a bottom on a worst case negative outcome assuming the deal gets approved, it also raises the political stakes and increases the likelihood of ratification issues. Many factions of parliament were already skeptical and introducing the transition period extension and customs union clauses, two highly contentious issues, does not help. Moreover, by taking a "this deal/no deal/no Brexit" approach, PM May polarizes the potential outcomes.

Looking forward, key dates to keep an eye on are the November 25 EU summit to formally agree to the deal and the December 10 UK Parliament "meaningful" vote should the EU approve the Withdrawal Agreement as expected.

End of the day, we are further along than we were last week but certainly not out of the woods yet.

MAJOR CENTRAL BANK ACTIVITY THIS WEEK

11/20	Hungary	Expectations for rates to remain unchanged at 0.90%

11/21	South Africa	Expectations for rates to rise by 25 bps to 6.75%

KEY MARKET MOVING ECONOMIC RELEASES

United States and Canada

11/20	Housing Starts	Expectations for a gain from 1,201k to 1,230k

11/21	Durable Goods	Expectations for a decline of 2.5% after a gain of 0.7%

11/21	Existing Home Sales	Expectations for a small increase

11/23	Manufact. PMI	Expectations for a small gain from 55.7 to 55.8

11/23	Canada CPI	Expectations for a gain of 0.1%; YoY remains at 2.2%

Europe/Eurozone

11/23	EZ Composite PMI	Expectations for a small decline from 53.1 to 53.0

11/19	German PPI	Expectations for a gain of 0.3%; YoY rises to 3.3%

11/23	German Compos. PMI	Expectations for a decline from 53.4 to 53.1

Asia/Japan, and New Zealand

11/21	Japan Nat’l. CPI	Expectations for a rise from 1.2% to 1.4% YoY

FORECASTS

EUR

The EUR started the week on the back foot as Italy stuck to its budget, raising the prospect of conflict with the EU. Ultimately, the EUR finished the week higher as dovish Fed comments appear to indicate that the Fed could be in the later stages of policy normalization. While near term Fed hike expectations have not changed, the number of hikes in 2019 has become more uncertain. Expect negative headlines surrounding the Italian and UK situation to continue to hit headlines. Expect consolidation, with a bias for lower, this week.

GBP

The GBP had a volatile week as the markets alternated between optimism and pessimism around a Brexit deal as multiple cabinet members have resigned. Expect the GBP to continue to move with every headline around a resignation or no-confidence vote. If PM May is able to make it to this Friday without a vote, she most likely will survive and focus should shift back to the deal on the table and the ability to push it through Parliament. Given near term uncertainty, the bias is for a lower GBP.

JPY

Ministry of Finance data shows that Japanese investors turned back to being net buyers of foreign bonds after two consecutive weeks of being net sellers. However, the JPY finished the week stronger on the back of a lower USD (dovish Fed comments) and an academic paper from a think tank associated with the BoJ indicating that removing negative interest rates could actually accelerate inflation. Expect range trading in a quiet holiday week.

CAD

The CAD has been the weakest performing major currency this year despite the Bank of Canada raising interest rates 3 times this year. For the week, the CAD appreciated as oil staged a bit of a recovery from last Tuesday's low as well as the USD suffering its first weekly loss since mid-October. USMCA is still expected to be signed by the end of November however increased ratification continues to weigh on the CAD. Expect consolidation in a quiet trading week.

CNY

While we don't expect significant progress to be made at the G20 meeting between Trump and Xi at the end of the week, positive headlines supporting the possibility of a deal with growth concerns and stock market declines nudging both sides towards an agreement has been positive for the CNY. Expect sideways trading as we move towards the G20 meeting at the end of November.

AUD

A very strong employment report provided support for the RBA's "glass half full" view and helped to power the AUD to become one of the G10's best performers. While the RBA remains in neutral for the near term, sentiment is building for a move up in 2019. As long as US-China trade headlines remain constructive, expect a steady to stronger AUD this week.

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