The Week Ahead: Bracing for Impact

Foreign Exchange: The Week Ahead
Bracing for Impact  
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Andrew Kositkun
Andrew Kositkun
Foreign Exchange Head Trader
The global economy continues to weaken with Europe (Germany, the UK and Sweden) showing particular weakness. With global manufacturing in a recession, export-oriented economies and sectors have been especially hit. While US data has been generally better than European data, cracks are starting to emerge as illustrated by the US ISM manufacturing series printing at a 10-year low.

Unfortunately, trade tensions keep escalating. The US has announced that it will impose a 25% tariff on a range of imports from the EU as a result of the WTO’s ruling on illegal Airbus subsidies. These tariffs, on their own, are relatively benign when compared to other tariff actions, but the US’s choice for escalation over negotiations does not bode well for the broader US-EU trade discussion. As a reminder, the US’s delay in EU auto tariffs expires on November 13. While the likelihood of these tariffs being extended are greater than for them being implemented, this risk cannot be ignored given the material impact auto tariffs would have. But for the markets, US-EU talks will be a topic for another day. In the near term, the markets will key in on Chinese Vice Premier Liu He’s visit to Washington for trade talks starting on October 10.

Face-to-face meetings between senior officials from both sides always warrants attention. However, the upcoming round of negotiations has an added level of importance given the US’s scheduled escalation in tariffs just five days later. Throughout the course of the current trade war, we have seen global growth decelerate after each escalation in tariffs. Given the binary nature of the tariff escalation and the increasingly precarious state of the global economy (services have started to show signs of weakness), it is reasonable to say that risks to the global economy and the trade war have risen.

From our perspective, a comprehensive deal agreement remains far off. The key issues—Huawei, IP theft, forced technology transfer, state subsidies –remain far from resolved. As it stands, the most the markets can reasonably expect is likely progress towards some sort of narrow deal that includes the Chinese purchasing more agricultural goods in exchange for a reduction in tariff levels.



Continuing weak economic data out of the EZ is offset by a narrowing of US–EZ interest rates as US rates dropped sharply last week and interest rate differentials narrowed favoring the euro. The euro has corrected higher but remains trapped within recent ranges. Key for the market this week will be the US-China trade talks that begin on Thursday. Expect more range trading until the end of the week.


The British pound remains mired within tight and narrowing ranges over the past two weeks. While extremely volatile intraday and highly sensitive to the continuing stream of Brexit headlines, the currency has remained stuck in narrow ranges. There are just too many uncertainties, probabilities and moving parts regarding the future course of Brexit that are keeping investors sidelined until a clearer picture emerges. Expect more of the same until we get to the trade talks.


The JPY continues to be highly sensitive to the US-Japanese interest rate differentials. US data was very weak last week, US interest rates moved sharply lower and the JPY was the top performing major currency over the past five trading sessions. Key for this currency will be the market’s reaction to the US-China trade talks. A successful interpretation of the meeting will lead to higher U.S. interest rates and a weaker JPY; conversely, a disappointing result will lead to the other extreme.


The CAD has been the weakest major currency over the past five trading sessions. After spending 14 days locked in a very narrow 1.3200-1.3300 range, the CAD weakened and broke out to the top side only to start consolidating in a new range. While the Bank of Canada monetary stance has been neutral while the Fed has been cutting interest rates, markets are concerned that the Bank of Canada will need to follow the US's lead. Key for the near term direction for the CAD will be the interpretation of the US-China trade talks.


The month of September was a bipolar month for this currency. The beginning of the month saw CNY strength as markets reacted positively to the restarting of the US-China trade talks and small positive gestures by both sides. Over the past two weeks, that market optimism has waned as markets and investors have scaled their expectations back for a real breakthrough on these talks. Expect markets to react strongly to the headline results of the trade talks; a disappointing result will result a weaker CNY while a positive outcome will yield a stronger CNY.


The Aussie, like the CNY, has had a bipolar month mirroring much of the CNY trading pattern. The Aussie outperformed in early September only to run out of steam and turn south to touch previous lows for the year. The Aussie has attempted to push through the .6700 level on five different occasions since August only to rebound. The market appears to have factored in enough negative news regarding the RBA, and combined with the rapid decline in U.S. interest rates, this has helped to provide near term support. Much is riding on the market reaction to the US-China trade talks.


10/7 Israel Expectations for rates to remain unchanged at 0.25%
10/10 United States US-China Trade talks begin
United States Fed Chairman Powell speaks on back to back days


United States and Canada

10/8 PPI Expectations for an increase of 0.1%; YoY at 1.8%
10/10 CPI Expectations for an increase of 0.1%; YoY rises to 1.8%
10/11 Canada Jobs Report Expectations for a gain of 5k; UR remains at 5.7%


10/07 German Ind. Product. Expectations for -0.2% following a -0.6% print
10/10 U.K. Indust. Product. Expectations for 0.0% print following a 0.1% increase
10/10 U.K. Trade Report Expectations for another large trade deficit

Asia/Japan, and New Zealand 

10/7 China PMI PMI data will be a key metric for the Chinese economy
10/7 Jap. Trade and CA Expectations for another large CA surplus
10/9 Japanese PPI Expectations for a 0.0% print; YoY at -1.1%
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