The Week Ahead: Permanent Changes on the Horizon

Foreign Exchange: The Week Ahead
Permanent Changes on the Horizon
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Alan Rose
Alan Rose
Foreign Exchange Senior Trader
At the most recent G20 meeting, the U.S. and China agreed to restart their trade talks. So far, there has been little to no progress as both sides remain dug in on key issues, but a successful conclusion to these talks will buoy optimism and help stabilize the world growth that continues to show evidence of decline. Markets remain optimistic that the U.S. and China will reconcile their trade differences over the next weeks and months.

However, as a stalemate continues between the world’s two biggest economies, multinational companies, long dependent on China, are relocating and establishing new supply chains elsewhere to avoid the massive U.S. tariffs imposed on Chinese exports. Many of these supply chains are being permanently realigned away from China to other Asian countries like Taiwan, Malaysia, Cambodia, Indonesia, Bangladesh, and India. In our hemisphere, companies are relocating to Mexico.

The Washington Post ran an article on Friday stating that 50 multinational companies are considering moving some production from China to elsewhere in Asia or are planning to pull production from China completely. Google, Apple, Nintendo, Nest, and Dell are just some of the companies mentioned that are reconsidering their singular production presence in China.

Multinational companies are preparing for the “new normal” regarding trade, supply chains and globalization. They cannot afford to have all their eggs in one basket and will most likely need to have multiple production sites to diversify their risk. The unfortunate part of this new realignment is that no multinational companies, U.S. or foreign-owned, have formally announced plans to relocate to the U.S. despite White House hopes.

MAJOR CENTRAL BANK ACTIVITY THIS WEEK

7/23 Hungary Expectations for rates to remain unchanged at 0.90%
7/25 Turkey Expectations for one-week repo rate to decrease by 2.00 % to 22.00%
7/25 Eurozone-ECB Expectations for refinancing rate to remain unchanged at 0.00%
7/26 Russia Expectations for rates to decrease by 0.25% to 7.25%

KEY MARKET MOVING ECONOMIC RELEASES

United States and Canada 

7/23 US Existing Home Sales Expectations for sales to remain unchanged at 5.35m
7/24 US Manuf. PMI Expectations for an increase from 50.6 to 50.9
7/24 US New Home Sales Expectations for an increase of 32k to 658k
7/25 US Durable Goods Orders Expectations for an increase of 0.8% vs -1.3% prior month
7/25 US Initial Jobless Claims Expectations for an increase of 2k to 218k

Europe/Eurozone 

7/24 US Existing Home Sales Expectations for sales to remain unchanged at 5.35m
7/25 US Manuf. PMI Expectations for an increase from 50.6 to 50.9
7/24 US New Home Sales Expectations for an increase of 32k to 658k
7/25 US Durable Goods Orders Expectations for an increase of 0.8% vs -1.3% prior month
7/25 US Initial Jobless Claims Expectations for an increase of 2k to 218k

Asia/Japan, and New Zealand 

7/23 New Zealand Trade Balance Expectations for trade balance of 100m vs 264m prior month
7/24 South Korea GDP Expectations for YoY increase of 1.9% vs 1.7% prior month
7/25 Japan – Tokyo CPI Expectations for YoY increase of 1.0% vs 1.1% prior month

FORECASTS

EUR

The EUR has remained trapped between $1.1200 and $1.1400 over the past six weeks. It continues to whipsaw in both bullish and bearish trends relative to economic data or Fedspeak; these trends seem to last a few hours to a day or two before momentum wanes and paralysis sets in. The ECB meets this week and markets will be watching closely for any changes in monetary policy or new ECB language concerning economic growth. 

GBP

Brexit uncertainty continues to hinder and undermine the GBP, but despite periods of U.S. dollar weakness, the GBP has had difficulty gaining upward traction.  Political developments have narrowed the Tory field to two candidates with Boris Johnson remaining the heavy favorite. He, too, will have 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.

JPY

For the past three months, the JPY has been one of the top performing major currencies appreciating by nearly 4%. The combination of a weakening U.S. economy and the collapse of U.S. interest rates is behind the JPY’s outperformance, but both U.S. interest rates and the JPY have stabilized over the past two weeks. Continue to expect the JPY to track U.S.-Japanese interest rate differentials and be most sensitive to “risk-on” or “risk-off” strategies.

CAD

Up until the beginning of June, the CAD had remained range bound testing both the upper and lower limits (1.3500/$ to 1.3100/$) numerous times with the net result of a nearly unchanged CAD since January. Since June, the CAD has appreciated by 2.75% as a combination of lower U.S. interest rates and improving CAD economic data have it testing the key $1.3100 level again. The Bank of Canada is standing pat for now, and in light of dovish tendencies in other key G7 central banks (U.S.), the C$ appears to be entering a new higher range.

CNY

After weakening sharply in April and May, the CNY finally stabilized in June and July. After the FOMC meeting on June 19, the CNY reflected overall U.S. dollar weakness but has returned to a consolidation pattern. The U.S. and China have agreed to restart trade talks but with little progress so far, and markets are anticipating a long and difficult road to reconcile differences. Expect more consolidation this week.

AUD

The AUD remains very resilient and continues to show a near term bottoming pattern despite the RBA cutting interest rates by 25 bps at back to back meetings in June and July. There is an element of the market that believes that the RBA is near the end of its rate cutting cycle. The Aussie, Kiwi, and the C$ have been three of the top performing major currencies over the past month.  Expect a steady to slightly stronger AUD this week.
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