The Week Ahead: Push and Pull

Foreign Exchange: The Week Ahead
Push and Pull
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Andrew Kositkun
Andrew Kositkun
Foreign Exchange Head Trader
Two key events moved the markets this past week—the less-dovish-than-expected Fed announcement and President Trump’s surprise announcement of another round of tariffs on Chinese exports to the US. 

Immediately after the Fed’s less-dovish-than-expected rate cut, the USD rallied to new YTD highs as markets priced in a more hawkish rate path.  This new narrative was quickly shattered by Trump’s tweet on further tariffs.  While these tariffs drove the markets to re-price in the cuts it took out after the Fed announcement, it doesn’t necessarily signal USD weakness.  As we pointed out in our currency outlook, the fate of the USD is more attached to global growth than the Fed’s rate path. 

On this point, the latest round of potential tariffs carries added significance.  While the proposed 10% tariff is a lower level than the existing tariffs on other goods, the negative impact could be more significant.  This is because the new round of tariffs are on consumer goods (larger price impact) and goods that were previously considered too crucial to US supply chains to be included in earlier rounds.  This then raises the possibility for a fresh round of PMI and global growth downgrades from already depressed levels. 

In the immediate future, we have a central bank (RBA) meeting in Australia.  Given its geographic location as well as commodity-linked economy, Australia has particular sensitivity to the Chinese economy and global growth in general.  After delivering back-to-back cuts, we believe the RBA will remain on hold to allow these cuts to work their way through the economy.  Given the current dynamic, the RBA will likely attempt to balance guidance between further easing, if needed, and a reasonably supportive growth environment due to cuts in June and July while maintaining a dovish bias.  This means that an August rate hold should be more of a pause than the end of rate cuts.         

FORECASTS

EUR

The EUR has finally broken through the key $1.1100 level that has been supportive for this currency since April. Continued weak EZ economic data combined with the heightened expectations for further ECB monetary stimulus provided the initial spark lower. The hawkish Fed rate cut from last week added more fuel to the fire causing further EUR weakness. However, the potential imposition of more tariffs on Chinese goods caused US interest rates to move another leg lower sending the US dollar lower and EUR higher. We expect consolidation and sideways trading this week.

GBP

Brexit uncertainty will continue to hinder and undermine this currency until such time that PM Boris Johnson can demonstrate an ability to shift the dynamics with the EC or with Parliament. Last Thursday, there were by-elections in the UK and the Tory party lost another seat providing PM Boris Johnson with a 1 seat working majority. The GBP continues to test multi-year lows going back to 2016. We continue to expect a steady to weaker GBP as the market continues to price in worst-case scenarios for the UK and the GBP.

JPY

The JPY had been relatively stable last week and weakened only slightly after the FOMC surprise while other currencies weakened sharply. Thursday was a game changer as the threat of more US tariffs by the White House on Chinese goods spurred a full risk-off environment with global equities and interest rates crashing; the JPY appreciated by near 2% on Thursday and Friday alone. Continue to expect the JPY to be highly sensitive to changes in US interest rates and to the US-Japanese interest rate differential. Expect a steady to stronger JPY this week.

CAD

Up to 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 steadily on the back of improving Canadian economic data and the Bank of Canada standing pat on interest rates while expectations were rising for a Fed rate cut. Over the past two weeks, the CAD has been correcting lower on the back of a generally stronger US dollar. Expect consolidation and sideways trading next week.

CNY

As the US and China decided to reconvene trade talks in June, markets have remained optimistic about a positive outcome even if that meant weeks and months of negotiations. Last Thursday’s threat of more tariffs on the remainder of Chinese exports was a game changer for the markets and for the CNY. Markets are pricing in further Chinese economic weakness; the CNY is reflecting that weakness as it has weakened sharply over the past 48 hours and is testing the psychological level of 7.00/$. Expect some consolidation with a bias toward more currency weakness.

AUD

AUD has closed lower for the last 9 trading sessions, reaching five year lows this past week. The commodity currency came under acute pressure after the announcement of additional US tariffs on Chinese consumer goods deepened economic uncertainty around the globe. Markets continue to price in Chinese weakness which can suppress global demand for commodities and in turn, reduce AUD demand. Expect a steady to weaker AUD this week.

MAJOR CENTRAL BANK ACTIVITY THIS WEEK

8/6 Australia Expectations for rates to remain unchanged at 1.00%
8/6 New Zealand Expectations for rates to decrease 25bps to 1.25%
8/7 Thailand Expectation for rates to remain unchanged  at 1.75%

KEY MARKET MOVING ECONOMIC RELEASES

United States and Canada

8/8 US June Wholesale Inv. Expectations for a MoM increase of 0.2%
8/9 US July  PPI Expectations for a MoM increase of 0.2%

Europe/Eurozone 

8/5 EU July Composite PMI Expectations to remain unchanged at 51.5
8/5 German July Composite PMI Expectations to remain unchanged at 51.4
8/5 UK 2Q GDP Expectations for a YoY increase of 1.4%
8/9 UK June Indst. Prod. Expectations for a MoM decrease of 0.2%
8/9 UK June Manuf. Prod Expectations for a MoM decrease of 0.2%

Asia/Japan, and New Zealand 

8/8 Chinese July Trade Balance Expectations for a trade balance decrease of $7Bn to $44Bn
8/8 Chinese July CPI Expectations for a YoY increase of 2.7%
8/8 Chinese July PPI Expectations for 0.0% change 
8/8 Japanese 2Q GDP Expectations for a QoQ increase of 0.1%
8/5 Australian June Trade Balance Expectations for trade surplus to increase by AUD 0.3Bn to AUD 6.0Bn
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