The Week Ahead: Can’t Keep Calm but Must Carry On

Foreign Exchange: The Week Ahead
Can’t Keep Calm but Must Carry On
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Andrew Kositkun
Andrew Kositkun
Foreign Exchange Head Trader
The UK Parliament returns from its summer recess this week in what could be a very short return.  PM Johnson has taken steps to suspend Parliament until October 14, effective no sooner than September 9 and no later than September 12.  This has been a controversial step as it stretches what is constitutionally accepted and sets up the GBP to have a very volatile first week of September as opposing forces clash in earnest.     

Typically, prorogation (discontinuing Parliament without dissolving it) runs for less than two weeks.  PM Johnson will suspend Parliament for 5 weeks.  In actuality, PM Johnson might have asked for a longer break if the UK government wasn’t legality obligated to report back to Parliament on the Northern Ireland power sharing talks with a debate on October 14. 

With most, if not all, paths leading to higher political and economic uncertainty, expect GBP volatility to remain high.  This is especially true given that there is no definitive path on how next week plays out.  You have a government that appears united to deliver on its goals and a Parliament that has been divided and scattered.  However, the members of Parliament (MPs) now appear more united than ever and should this unity be maintained, here is a possible path for next week:
  • Tuesday: The MPs return and Corbyn could call for an emergency debate that will likely be granted given Speaker Bercow’s view that PM Johnson’s prorogation is a “constitutional outrage.”  Parliament could then vote to take control of the business of the House.
  • Wednesday/Thursday: Assuming the above vote passes, the door opens for a Letwin-Cooper like bill which likely aims to ban the prorogation of Parliament and mandate an extension of Article 50.  Expect Parliament to instruct that they, and not PM Johnson, can reject or accept terms of an extension.  Process wise, the bill has to pass both Houses of Parliament.
  • Weekend: While MPs will aim to pass this during the week, they are prepared to sit through the weekend if needed. 

If all this passes, and this is a major if, the government will not willingly ask for an extension as it views that as a “betrayal” Brexit.  As such, PM Johnson could pivot to calling an early election or pursue legal challenges to this process in the courts. 

Ultimately, next week will be a pivotal week.  Should the MPs be unsuccessful in their attempts, the ball returns to the EU.  But over the next couple of days, it’s all about the UK with markets bracing for a bumpy road ahead.

 

FORECASTS

EUR

The euro continues to reflect the ongoing concerns about the state of the EZ economy and, in particular, German weakness as too many countries are overly dependent on exports as world growth weakens. Markets remain highly concerned about continued EZ economic weakness as well as the possibility of ECB easing. The combination of these events has weighed on sentiment as the euro fell on five consecutive days last week and broke through the key psychological level of $1.1000. Expect a steady to weaker euro this week.

GBP

The GBP has been driven by Brexit headlines.  As such, expect GBP volatility to move higher as Parliament and the government face off this week (see above).  Longer term, expect the GBP to continue to move lower on the possibility of a no-deal Brexit.  For next week, expect the pound to be moved around by headlines out of Parliament.    

JPY

For the past three months, the JPY has been the top performing major currency appreciating by nearly 3%. The continuing safe haven status of this currency combined with 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. U.S. – China trade war rhetoric will add or subtract to this safe haven currency’s status. Expect further consolidation this week.

CAD

The CAD has been caught in a narrow but turbulent range for August. Opposing forces regarding a solid Canadian economy versus a slowing global economy and falling commodity prices have left investors and traders paralyzed for the short term. The bias for the U.S. dollar remains strong; expect a steady to weaker CAD this week.

CNY

Since the CNY broke through the key psychological level of 7.00/$ on August 5, the CNY has remained vulnerable to further weakness touching near 7.20/$ last week. Despite a slightly positive change in China’s rhetoric towards the U.S. last week, the CNY remains vulnerable. Continue to expect a steady to weaker CNY as long as the DXY remains strong and there is no new progress on the U.S. – China trade talks.

AUD

The AUD, like the CAD, has been caught in a narrow but emotionally charged range since the beginning of August. The RBA meets this week and is expected to keep interest rates unchanged after cutting interest rates twice over the past months. Markets are expecting a dovish hold by the RBA. Given the current strength of the U.S. dollar, expect a steady to slightly weaker AUD.

MAJOR CENTRAL BANK ACTIVITY THIS WEEK

9/2 Australia Expectations for rates to remain unchanged at 1.00%
9/4 Canada Expectations for rates to remain unchanged at 1.75%
9/5 Sweden Expectations for rates to remain unchanged at 0.25%
9/6 Russia Expectations for rates to be cut by 25 bps to 7.00%

KEY MARKET MOVING ECONOMIC RELEASES

United States and Canada

9/3 ISM Manufacturing Expectations for an unchanged print of 51.2
9/4 Trade Balance Expectations for a slight improvement in the trade deficit
9/5 ADP Employment Expectations for a gain of 145k following a gain of 156k
9/6 U.S. Jobs Report Expectations for a gain of 163k; UR to remain at 3.7%
9/4 Canada Trade Report Expectations for a small deficit following a small surplus
9/6 Canada Jobs Report Expectations for a small gain of 10k; UR remains at 5.7%

Europe/Eurozone 

9/4 EZ Manufacturing PMI Expectations for a 47.0 print
9/6 EZ Q2 GDP Expectations for a final print of 0.2%; YoY at 1.1%
9/4 German Fact. Orders Expectations for another sharp decline of 4.1%
9/5 German Ind. Product. Expectations for a gain of 0.4% following a -1.5%

Asia/Japan, and New Zealand 

9/2 China Manufacturing PMI Expectations for a slight for a 49.6 print
9/3 Aussie Q2 GDP Expectations for a gain of 0.5%; YoY drops to 1.4%
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