This past week, the FX markets woke up from the slumber it has been in for the past couple months. Notably the drivers that pushed exchange rates out of their well-defined ranges were local events and not global economic events that granted clarity to the global growth outlook. As a result, it still remains unclear as to whether or not these latest moves are sustainable.
Specifically, it remains to be seen how the Fed will react to recent economic data, whether or not the pick-up in Chinese/Asian economic data has legs, when the U.S./China trade deal will be finally be completed and whether the U.S. will end its trade policy aggression.
Starting with the Fed, this week's FOMC meeting will provide the markets with an updated look at how the Fed looks at inflation. The Fed has been increasingly dovish throughout the year, leading the markets to price in a materially dovish rate path. Outside of signaling a rate cut, it will be difficult for the Fed to be more dovish than it already is, shifting the risk to the Fed being more hawkish than expected.
Economically speaking, there will be a slew of economic data prints that will be closely watched. South Korea's economic reports this week should have greater than normal importance as the markets assess how the pick-up in China is impacting the broader Asian manufacturing complex. In a similar vein, PMI prints around the world will either confirm or disprove the depth and breadth of the nascent global recovery. Finally, Chinese officials will be visiting the U.S. for further talks in hopes of finalizing a deal that the markets are increasingly expecting by late May/early June.
Markets have always been fast moving. With a packed week of events and economic data points, it's quite possible we could finally be gaining clarity on the global outlook. Then again, as recent history has shown, mixed signals this week could leave thing more muddled than they currently are.
MAJOR CENTRAL BANK ACTIVITY THIS WEEK
Expectations for rates to remain unchanged at 2.50%
Expectations for rates to remain unchanged at 0.75%
Expectations for rates to rise from 1.75% to 2.00%
KEY MARKET MOVING ECONOMIC RELEASES
United States and Canada
Personal Inc. & Spend.
Expectations for solid increases in both metrics
Expectations for an increase from 58.7 to 59.0
ADP Employ. Report
Expectations for a gain of 180k
Expectations for a decline from 55.3 to 55.0
Expectations for a gain of 185k; UR to remain at 3.8%
Canada Feb. GDP
Expectations for a print of 0.0% after a gain of 0.3%
EZ Q1 GDP
Expectations for a gain of 0.3% after a gain of 0.2%
German Jobs Report
Expectations for the UR rate to remain at 4.9%
German Retail Sales
Expectations for a decline of 0.50%; YoY falls to 2.9%
U.K. Manufact. PMI
Expectations for a sharp decline from 55.1 to 53.1
Asia/Japan, and New Zealand
China Caixin PMI Mfg.
Expectations for a gain from 50.8 to 51.0
New Zealand Jobs
Expectations for a small gain in jobs; UR drops to 4.2%
The EUR finally broke out of its recent trading range to the downside as the USD strengthened and poor European data continued. As the breakout was driven more by local factors, as opposed to clarity on global economic trends it remains to be seen if this trend is sustainable. Currently the recovery in European seems less convincing than the recovery in China. As such, this week's EZ GDP data will be in focus. Expect the euro to remain biased for lower.
This week's Bank of England (BoE) will be closely watched to see how the bank balances the drag from continued uncertainty with the relief provided by the Brexit extension. The BoE's upward trending inflation forecasts hints at a hawkish bias, but expect rates to remain on hold and possibly comment on the market's overly dovish rate path assumption. Expect the GBP to range trade, with a bias for lower, as little progress has been made on talks and the markets reassess its assumption that Parliament will be able to find a consensus path.
Strong demand for foreign assets from Japanese investors continues to support a weaker yen. Additionally, the Bank of Japan has reiterated its pledge to keep rates lower for "a considerable period." However for this week, Japan will be out for its Golden Week holiday. As a result, yen liquidity should be thin, leaving it vulnerable to sharp moves in either direction. As a final note, trade talks with the U.S. will reportedly include currency clauses.
The Bank of Canada (BoC) joined other DM central banks in taking a dovish turn. By removing bias for a hiking bias, which it has held for a while, the BoC is most likely on the sideline for the foreseeable future, especially in light of the slack in the economy. As a final note, with the key ITC report out of the way, rhetoric surrounding ratification of USMCA is expected to pick up and increase risk to the CAD. Expect the CAD to be biased toward further weakness.
President Xi publically reiterated his stance that China does not seek to devalue the CNY last week. This is notable as it is rare for the Chinese President to comment publically on the currency as illustrates China's desire for a stable currency during trade negotiations. The CNY has been relatively unchanged over the past month and we expect this stability to continue.
The AUD has been supported by commodity prices and signs of an economic recovery in China. However, absent a wider recovery in Asia, the benefit to the AUD will be limited. Moreover, domestic factors continue to pressure the AUD. Most recently surprisingly soft inflation data raised the possibility for a rate cut up to ~90% by the end of the year. Expect the AUD to be range bound with a biased toward further weakness.
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