After a period where trade dominated the market narrative, economic data and central bank policies took center stage this past week.
Of particular note was the jobs report in the US that showed a strong rebound in hiring after a soft employment report last month. This robust jobs report seemingly eliminates the possibility of the Fed cutting 50 bps at its meeting this month and raises the possibility it doesn’t cut at all. Expect markets to be focused on Jay Powell’s testimony to Congress next week for clues on the implications of this strong jobs report.
As we have discussed in prior commentaries, absent a trade war, the economic data doesn’t support the aggressive Fed rate cut path that markets have priced in. As such, expect the market’s focus to swing back to trade talks as the US and China are expected to formally resume negotiations next week. While the G20 has reset talks, it is important to remember that the fundamental differences between the two nations remain unresolved. Of course, this isn’t to say that the Fed will only be about data. President Trump has stepped up the frequency and intensity of his criticism of the Fed, opening up the possibility for further escalation in verbal intervention and adds another headwind to the USD.
Over in Europe, Christine Lagarde has been nominated to succeed Mario Draghi as head of the ECB. While a surprise choice, the markets have welcomed the selection. Based on her comments on the Eurozone and the global economy, Lagarde appears to be supportive of the ECB’s easing policies. However, should further easing from the ECB be required, Lagarde will likely have to build consensus as the ECB is running up against many red lines. But in the near term, the EU Commission’s decision not to take disciplinary action against Italy does provide some breathing room for the euro as it removes a key risk from the short term picture.
A strong US jobs report has thrown into doubt the Fed rate cut narrative. Because of the report, combined with continued poor economic data out of Europe, expect the euro to be pressured weaker. However, the EU Commission’s decision not to take action against Italy does provide a bit of near term relief.
A poor run of economic data illustrates the continued drag that Brexit is having on the currency. Concerns over UK growth was enhanced by comments from BoE governor Carney as he acknowledged lower growth outlooks. We remain bearish the GBP and expect the markets to become increasingly focused on the race for PM as we get close to the week of July 22.
A retracement in Fed cut expectations due to strong employment data in the US pushed USDJPY to a new high for the month. With US rates a key driver for the yen, keep an eye on Jay Powell’s Congressional testimony and the Fed minutes next week. Continue to expect the JPY to track US – 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.
The CAD has been the top performing G10 currency over the past month. Given the string of positive employment reports, the most recent soft jobs data likely doesn’t change the BoC’s path especially in light of strong wage growth. The BoC is expected to remain on hold. On its own, this likely doesn’t move USDCAD but could pressure CAD stronger when compared to next week’s dovish Fed minutes.
Strong inflows into Chinese bonds as well as a trade truce with the US has provided support for the CNY. Trade talks with the US are expected to officially kick off this week. As such, expect trade headlines to drive the currency near term.
Conditional RBA guidance and rising iron ore prices have provided support for the AUD. However, calls from the Chinese Iron and Steel Association to the government to control prices has cut into these price gains. Lackluster retail sales illustrates the challenges facing the domestic economy. We expect the AUD to trade lower.
MAJOR CENTRAL BANK ACTIVITY THIS WEEK
Expectations for rates to remain unchanged at 1.75%
KEY MARKET MOVING ECONOMIC RELEASES
United States and Canada
Expectations for 0.0% MoM change
Expectations for 0.1% MoM increase
Canadian Housing Starts
Expectations for a 208.6k print
EU Industrial Production
Expectations for a 0.2% MoM increase
Expectations for a 0.3% MoM increase
UK Industrial Production
Expectations for a 1.5% MoM increase
Asia/Japan, and New Zealand
Chinese CPI and PPI
Expectations for a 2.7% and 0.3% YoY increase, respectively
Want to learn more about international finance, economics, and global events? Sign up for our other Foreign Exchange emails and videos!
Follow City National Bank on social media:
Non-deposit investment products:
Are not FDIC insured,
Are not deposits or other obligations of City National Bank and are not guaranteed by City National Bank, and
Are subject to investment risks, including possible loss of the principal invested.
This report is for general information and education only and was compiled from data and sources believed to be reliable. City National Bank does not warrant that it is accurate or complete. Opinions expressed and estimates or projections given are those of the authors as of the date of the report with no obligation to update or notify of inaccuracy or change. This report is not a recommendation or an offer or solicitation to buy or sell any financial instrument discussed. It is not specific investment advice. Financial instruments discussed may not be suitable for the reader. Readers must make independent investment decisions based on their own investment objectives and financial situations. Prices and financial instruments discussed are subject to change without notice. Instruments denominated in a foreign currency are subject to exchange rate and other risks. City National Bank (and its clients or associated persons) may engage in transactions inconsistent with this report and may buy from or sell to clients or others the financial instruments discussed on a principal basis. Past performance is not an indication of future results. This report may not be reproduced, distributed or further published by any person without the written consent of City National Bank. Please cite source when quoting.
Now accepting scholarship apps Celebrating 40 years of service -- A loan to an innovative company -- Affording your dream home -- Mergers and a new branch in Raleigh View this email in your browser Forward to a friend
Your Market News update for May 30, 2019 | View online Market News News that's moving the market now As Trade-War Worries Linger, Market Seems to Lack Buying Conviction May 30, 2019 8:40 AM | JJ Kinahan 6 min read | Daily Market Update