The Week Ahead: An Ounce of Prevention versus a Pound of Cure
An Ounce of Prevention versus a Pound of Cure
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Andrew Kositkun Foreign Exchange Head Trader
The focus this past weekend was rightfully the G20 meeting with particular focus on the meeting between Presidents Trump and Xi. As we kick off the second half off the year, the market’s focus should shift back to the Fed and what its rate path will be.
The Fed finds itself in a tricky situation as it tries to balance not overreacting to one-off data points and maintaining the current expansion. This conflict facing the Fed has been illustrated by comments from Fed Chair Powell this past week. In his speech, he noted that “it’s important not to overreact in the short term to things that happen to be temporary or transient.” But then he remarked that “an ounce of prevention is worth a pound of cure.”
Adding to the complexity is the possibility for a change in how the Fed views inflation. With concerns over low inflation expectations, there appears to be a shift towards a “make-up” strategy to reset expectations. Moreover the Fed appears to be more comfortable making a mistake by being too loose rather than being too tight as it has more tools to tighten policy. If true, this would imply an increased appetite for an “insurance cut” to extend the expansion and ultimately move the Fed away from the effective lower bound.
With key data points—manufacturing and labor market—coming this week, the timing and magnitude of the Fed’s actions could materially shift. Manufacturing data is due July 1. With the Fed concerned over manufacturing weakness spilling over to consumer measures, they will be watching this data series closely.
The government’s employment report will be released on Friday and represents one of the most important economic data points. After a bad miss last month, the Fed will be watching for confirmation on whether it was a blip or the start of a trend.
Markets have priced in 32.5 bps of cuts in July (a split between expectations of a 25 and 50 bps cut). Expect data, especially labor market data, over the next few weeks to break the deadlock between cut or no cut as well as the magnitude of a cut, should one come.
MAJOR CENTRAL BANK ACTIVITY THIS WEEK
Expectations for rates to be cut by 25 bps to 1.00%
Expectations for rates to remain unchanged at -0.25%
Expectations for rates to remain unchanged at 1.50%
KEY MARKET MOVING ECONOMIC RELEASES
United States and Canada
Expectations for a decline from 52.1 to 51.0
ADP Employ. Report
Expectations for a gain of 140k following a gain of 27k
Expectations for a larger trade deficit
U.S. Jobs Report
Expectations for a gains of 163k; UR to remain at 3.6%
Canada Trade Report
Expectations for a larger trade deficit
Canada Jobs Report
Expectations for a small gain; UR rises to 5.5%
EZ Jobs Report
Expectations for the UR to remain at 7.6%
German Jobs Report
Expectations for a flat report; UR remains at 5.0%
German Factory Ords.
Expectations for a decline of 0.1% following a 0.3% print
U.K. PMI Manufact.
Expectations for a slight increase from 49.4 to 49.5
Asia/Japan, and New Zealand
China Caixin PMI
Expectations for an unchanged print of 51.5
Aussie Trade Report
Expectations for an increase in the trade surplus
After the last FOMC meeting and the dovish interpretation which resulted in stronger EZ currencies and EUR, markets have stabilized and consolidated over the past five days. Almost all asset classes have been on hold as they await the key G20 meeting between President Trump and President Xi. Expect more volatility this week depending on the outcome of the G20 meeting.
The GBP has mirrored the movements of the EUR the past five days. Brexit uncertainty continues to hinder and undermine this currency. Political developments have narrowed the Tory field to two candidates with Boris Johnson the heavy favorite. He too, will face a daunting task of facing a much divided country and Parliament in reaching a conclusion to the Brexit process. Expect the GBP to lag behind the advancement of other currencies and remain susceptible to weakness.
For the past three months, the JPY has been one of the top performing major currency appreciating by 2.61% but this past week has seen consolidation and sideways trading. The combination of a weakening U.S. economy and the collapse of U.S. interest rates is behind the JPY’s outperformance. Continue to expect the JPY to track U.S. – Japanese interest rate differentials and to weaken or strengthen on the back of the G20 meeting with regards to “risk-on” or “risk-off” trading.
Up to the beginning of June, the CAD had remained range bound testing both the upper and lower limits numerous times with the net result of a near unchanged CAD since January. Since June, the CAD has appreciated 3.10% as a combination of lower U.S. interest rates and improving CAD economic data have it testing the key $1.3100 level again. A positive outcome to the G20 meetings should provide a back drop for a stronger CAD; if not, expect CAD to return to its range bound nature.
After weakening sharply in April and May, the CNY finally reached an equilibrium point in June; after the FOMC meeting on June 19th, the CNY has reflected U.S. dollar weakness. Expect Monday morning markets to be volatile and reflect the optics and substance of the meeting between President Trump and President Xi.
The AUD is very resilient in the face of the expected RBA rate cut this week. The AUD, along with the NZD and CAD, has been outperforming over the past two weeks with the AUD appreciating in seven of the past nine sessions. Monday could be a volatile sessions depending on the markets interpretation of the U.S – China trade talks but it would appear that a weaker AUD will find buyers.
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