The Week Ahead: Micro Optimism, Macro Caution

Foreign Exchange: The Week Ahead
Micro Optimism, Macro Caution
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Andrew Kositkun
Andrew Kositkun
Foreign Exchange Head Trader
Equity markets and interest rates around the world moved higher last week as upbeat sentiment on US-China trade and Brexit helped markets price out worst-case scenarios. While these are certainly positive developments, there still remain risks ahead of the November APEC summit where details on the deal and actual progress will become clearer.

On a broader level, a significant amount of optimism has been priced into the markets. Against a backdrop of a fragile global economy, improved sentiment can only go so far. Absent concrete progress on structural policies that have impacted trade and manufacturing, it is hard to feel good about the sustainability of the recent positive sentiment.

As such, we still remain bullish on the USD despite its pullback over the course of this month. While the USD remains expensive and recent US data has softened, the US economy still remains relatively stronger than the rest of the world. Globally, survey data remains near stalled/contractionary levels as illustrated by last week's disappointing European and Japanese PMI prints, further highlighting the divergence between FX exchange rates and data.

Even with a Fed rate cut expected next week, there remains a strong case for USD strength. Markets are pricing a very dovish path for the Fed, making it difficult to actually meet expectations. Moreover, with the Fed cutting because of global reasons, as opposed to local reasons, expect USD to be supported by cuts from other central banks around the world.

A significant amount of the slowdown in the Eurozone economy can be attributed to global trade tensions and related uncertainties. Clearly, the US-China truce and agreement in principle on the "Phase 1" trade deal are good news and avoid further tariff increases. But, US tariffs are still higher on the year and have negatively affected the Eurozone economy with Germany particularly hit hard. Absent a comprehensive deal that rolls back tariffs to pre-trade war levels, it is difficult to envision the rebound in global growth needed for sustained USD weakness.

FORECASTS

EUR

In the very short term, the EUR continues to reflect and to be held captive to the trials and tribulations of Brexit and the market reactions to GBP volatility. Continue to expect the EUR to shadow and be hinged to the GBP until the FOMC meeting on Wednesday. In addition, the U.S. jobs report on Friday could also be another market-moving event for the U.S. dollar and other key currencies.

GBP

The GBP is still up nearly 5% in October but off of its best levels of the month. The GBP faded last week as more short term hurdles and impediments have been put in place to reach a successful conclusion to Brexit. The twin variables that will be haunting the market and creating uncertainty in the days and weeks ahead are the date of a U.K. election and an unknown timeframe granted by the EU for a possible Brexit extension. Continue to expect a volatile GBP as it reacts to headlines surrounding Brexit compounded by the FOMC decision and the U.S. jobs report.

JPY

The JPY weakened in the early weeks of October as improving risk sentiment and psychology impacted the markets as optimism surrounding Brexit and the U.S.-China trade talks hit the wires. However, the past two weeks have seen the JPY sidelined and rangebound as enough optimism surrounding risk has been priced in for now and markets await the U.S. FOMC meeting and the U.S. Jobs report. The correlation of the JPY with U.S.-Japanese interest rate differentials will continue to be an important driver for this currency; expect a volatile week ahead and a breakout from the recent consolidation pattern.

CAD

The results of the Canadian Federal election last Monday has done little to discourage the CAD from continuing its most recent advancement. Canadian economic data continues to outperform and has allowed the Bank of Canada to remain on the sidelines relative to other G10 countries. U.S. vs. Canadian interest rate differentials have narrowed and have allowed the CAD to outperform. With both the Bank of Canada and the Federal Reserve meeting this week combined with the U.S. jobs report on Friday, expect a volatile week ahead.

CNY

As optimism continues to build for a mini-breakthrough on the U.S.-China trade talks, the CNY has continued to appreciate from its worst levels seen in early September. While markets remain hopeful for a small positive step forward next month, a larger and broader based agreement will remain elusive and will need much more time to conclude. Continue to expect the CNY's direction to be impacted on multiple fronts and to reflect the tone of the trade talks, the FOMC meeting, the direction of U.S. interest rates, and the overall direction of the DXY.

AUD

The Aussie remains in no-man's land since August. The Aussie has reflected the bipolar responses regarding U.S-China trade and has gone through brief periods of both bullishness and bearishness. From a purely technical standpoint, it appears that the A$ is trying to bottom and recent economic data (jobs report) has been supportive of a near term end to RBA easing. Expect the Aussie to reflect overall U.S. dollar dynamics contingent upon the results of the FOMC, U.S. jobs report and the direction of U.S. interest rates.

MAJOR CENTRAL BANK ACTIVITY AND KEY EVENTS THIS WEEK

10/30 Canada Expectations for rates to be unchanged at 1.75%
10/30 United States Expectations for rates to be cut 25 bps to 1.75%
10/30 Brazil Expectations for rates to be cut by 50 bps to 5.00%
10/30 Japan Expectations for rates to be unchanged at -0.10%
10/31 U.K. Currently scheduled Brexit deadline

KEY MARKET MOVING ECONOMIC RELEASES

United States and Canada

10/30 ADP Employ. Report Expectations for a slight decline from 135k to 125k
10/30 Q3 GDP 1st look Expectations for a decline from 2.0% to 1.6%
10/31 Pers. Inc. & Spending Expectations for gains of 0.3% respectively
11/1 Jobs Report Expectations for a gain of 90k; GM strike to impact data
10/31 Canada August GDP Expectations for a gain of 0.2%; YoY rises to 1.4%

Europe/Eurozone 

10/31 EZ Q3 GDP Expectations for a gain of 0.1%; YoY declines to 1.1%
10/30 German Jobs Report Expectations for unemployment to rise; UR at 5.0%

Asia/Japan, and New Zealand 

10/30 China Manufact. PMI Expectations for an unchanged print of 49.8
10/28 Tokyo CPI Expectations for an increase from 0.4% to 0.7% YoY
10/30 Japan Indust. Product. Expectations for a gain of 0.4% following a -1.2% print
10/31 Japan Jobs Report Expectations for the UR to remain at 2.2%


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