The Week Ahead: King of the North

Foreign Exchange: The Week Ahead
King of the North
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Andrew Kositkun
Andrew Kositkun
Foreign Exchange Analyst
The Bank of Canada meets next week and is widely expected to keep rates unchanged.  To drive home this point, the markets are currently pricing in a 0% chance of a hike and a 6.5% chance of a cut.  Looking forward, 2019 is setting up to be a more constructive year for Canada and not only because the BoC is expected to hike in January of next year.   
Much of the focus in 2018 was around the will they/won't they circus surrounding NAFTA/USMCA.  With an agreed upon text signed by all three countries this past week, most of this drama is behind us.  For 2019, the NAFTA related risk factor now becomes ratification.  Ultimately, we see USMCA being ratified, but it is likely that between now and then there will be some drama in Congress. 

This supports the view for near term weakness as temporary periods of ratification drama are likely to pop up between now and the eventual ratification.  Additionally, the drop in oil prices has been exacerbated by local bottlenecks that are likely to persist until the latter half of 2019 when the first pipeline expansion under construction completes. 

Post-USMCA ratification, which we see around mid-2019, it is likely the Canadian economy should receive a further boost beyond an increase in oil supply.  The full resolution of uncertainty following the ratification of USMCA should see a pickup in Canadian investments as the uncertainty drag fades.  Additionally, the recently announced tax-write off increase should provide another additional boost to Canadian capex spending allowing the CAD to reverse some of its early weakness and finish 2019 strong.        


12/3 Australia Expectations for rates to remain unchanged at 1.50%
12/4 Chile Expectations for rates to remain unchanged at 2.75%
12/5 India Expectations for rates to remain unchanged at 6.50%
12/5 Canada Expectations for rates to remain unchanged at 1.75%
12/5 Poland Expectations for rates to remain unchanged at 1.50%


United States and Canada

12/3 ISM Manufacturing Expectations for a slight decline from 57.7 to 57.6
12/5 ADP Employment Expectations for a gain of 195k
12/6 Trade Balance Expectations for a larger trade deficit
12/7 Jobs Report Expectations for a gain of 200k; UR remains at 3.7%
12/6 Canada Trade Expectations for a small increase in the deficit
12/7 Canada Jobs Expectations for a gain of 10k; UR remains at 5.8%


12/7 Final EZ Q3 GDP Expectations for a Q3 gain of 0.2%; YoY at 1.7%
12/3 German Manuf. PMI Expectations for a final print of 51.6
12/5 Germany Fact. Orders Expectations for a decline of 0.5% after a gain of 0.3%
12/6 German Indust. Prod. Expectations for a gain of 0.3% after a gain of 0.2%
12/3 U.K. PMI Manufact. Expectations for a gain from 51.1 to 51.7

Asia/Japan, and New Zealand

12/4 Australia Q3 GDP Expectations for a gain of 0.6% after a gain of 0.9%
12/5 Australia Trade Expectations for another solid trade surplus



The EUR continues to consolidate but remains in a general downward trajectory. Weak German economic data, concerns about U.S. tariffs on EU auto exports, and Italian budget excesses and conflict with the EC continue to hurt sentiment. Even Chairman Powell’s apparent shift in Fed policy last week only provided short term relief for the EUR. Chairman Powell testifies before Congress on Wednesday.


The GBP also continues to remain soft with the extra added volatility provided by the Brexit negotiations and PM May's standing within the Tory Party. While progress surrounding Brexit is being made, the market remains skeptical. The British pound is sitting near YTD lows. Expect more consolidation ahead with a downward bias. 


The JPY is one of the more difficult currencies to forecast as the historical correlations between the JPY and equities, risk and interest rates has broken down. Despite all the recent equity fallout, both the JPY and CHF have weakened since October. Expect more consolidation ahead for now with the 114/$ area providing strong resistance.


The CAD has remained weak reflecting the sharp drop in oil prices since the beginning of October. The probability of the Bank of Canada raising interest rates this week has dropped from 97% on October 1 to nearly 0.0% today. Continue to expect the CAD to follow the price of oil along with the broad influence of the DXY index.


The CNY continues to consolidate over the past few months but remains pinned down near YTD lows and multi-year lows. Markets are hoping for some positive feedback out of the G20 meeting, but markets remain very concerned and anxious about a long and protracted trade war. Expect more consolidation with a bias toward more CNY weakness.


The AUD and NZD have both corrected higher over the past month as economic data from both countries have outperformed. This is despite a drop in commodity prices over the past month and weak Chinese economic data which have caused weakness in the past. Expect more consolidation ahead.
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