For many reasons, 2019 turned out to be a rare type of year. Chief among these reasons has been the stellar performance from both the equity and fixed income markets. On its own, this is an impressive feat but even more so when you consider that the global economy has slowed this past year. Looking at 2020, it is unlikely that we will see a repeat performance. This view, ironically, is despite recent headlines supporting a fading of downside risk.
On the positive side, Brexit risks appear to have subsided and the US and China are on track to complete a Phase 1 deal. While the rollback in tariffs are expected to be modest, it is still a significant step. Moreover, consumer consumption and the labor markets remain impressively resilient to the headwinds from manufacturing. To this last point, the industrial sectors in China and Europe are starting to show signs of stabilization.
Unfortunately, fewer downside risks does not always positive growth surprises. The global economy is starting from a lower point this time around than a year ago. While the euro area is expected to perform better this year, there are still structural issues and additional fiscal stimulus is unlikely in 2020. Additionally, China is unlikely to launch the type of stimulus it did in 2015-16 that created the foundation for the global recovery in 2017.
What this likely means is that we are looking at an unexciting year where growth is slightly stronger in 2020 than in 2019 but not anywhere near where it was in 2017. But of course, the best-laid plans of mice and men often go awry. The risk factors that we touched on above are simply diminished and not resolved. The UK still needs to negotiate a trade deal with the EU, meaning a hard Brexit outcome is still possible, and US-China tensions will still remain even if a Phase 1 deal ultimately gets signed. So while there is hope for positive returns this year, good analysis and currency strategies are as important as ever.
The foundation for EURUSD to move higher is starting to form. The reduction in trade and Brexit risks should benefit the EUR and weaken the dollar. Moreover, there are burgeoning signs of stabilization in European industrial production data. These factors should lead to scope for EURUSD to move higher by the end of 2020. In the near term, expect range trading as the markets wait to move past the holidays.
The GBP is roughly where it was pre-election. It's reasonable to say the passage of the Withdrawal Agreement should be a done deal, but the reality is that a hard Brexit outcome still remains on the table should the two sides fail to reach a trade deal and not extend the transition period. As such, expect volatility to remain elevated and gains to be capped.
The JPY has been on a weakening trend since September 1 coinciding with the resumption of U.S. – China trade talks. But over the past month, the JPY is unchanged as U.S. interest rates have stabilized. Looking at 2020, the BoJ is likely on hold for the near future as it assesses the impact of fiscal stimulus. With both the Fed and BoJ on hold, expect USDJPY to continue to range trade.
The Canadian dollar has had a run of disappointing data that supports the narrative of a slowing economy as temporary tailwinds fade and the global slowdown weighs on the domestic economy. In the near term, the BoC's resilience to the global easing trend and Canada's relatively high interest rate should provide support for the currency. Longer term, expect the BoC to adopt an increasingly dovish stance and the CAD to finish 2020 weaker.
Over the past two weeks, the yuan has been moving back and forth over the 7 yuan to 1 USD level. There are initial signs that industrial data in China is starting to stabilize, albeit at a low level. Additionally, the Phase 1 deal is expected to be signed early next year and should provide another shot in the arm for the Chinese economy. Given this, it is important to note that the key trade issues between the US and China remain unresolved. For now, expect the PBoC to aim for continued currency stability.
Easing of trade tensions and continued risk-positive headlines have helped the AUD move to its highest levels since the middle of 2019. Given this, the domestic economy remains challenged with misses on the RBA's inflation and employment targets. Not much likely happens until after the holidays, but the expectation remains for the AUD to weaken and the RBA to ease again next year.
MAJOR CENTRAL BANK ACTIVITY THIS WEEK
There are no major central bank meetings this week.
KEY MARKET MOVING ECONOMIC RELEASES
United States and Canada
Expectations for a gain from 46.3 to 48.0
Expectations for a gain from 48.1 to 49.0
Expectations for a slight improvement from 51.4 to 51.6
EZ Manufact. PMI
Expectations for an unchanged print of 43.4
German Manuf. PMI
Expectations for a gain from 49.4 to 49.9
German Jobs Report
Expectations for the UR to remain at 5.0%
U.K. Manufact. PMI
Expectations for a gain from 47.4 to 47.6
Asia/Japan, and New Zealand
Chinese Manuf. PMI
Expectations for a small decline from 50.2 to 50.1
Chinese Caixin PMI
Expectations for a small decline from 51.8 to 51.6
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This report is for general information and education only and was compiled from data and sources believed to be reliable. City National Bank does not warrant that it is accurate or complete. Opinions expressed and estimates or projections given are those of the authors as of the date of the report with no obligation to update or notify of inaccuracy or change. This report is not a recommendation or an offer or solicitation to buy or sell any financial instrument discussed. It is not specific investment advice. Financial instruments discussed may not be suitable for the reader. Readers must make independent investment decisions based on their own investment objectives and financial situations. Prices and financial instruments discussed are subject to change without notice. Instruments denominated in a foreign currency are subject to exchange rate and other risks. City National Bank (and its clients or associated persons) may engage in transactions inconsistent with this report and may buy from or sell to clients or others the financial instruments discussed on a principal basis. Past performance is not an indication of future results. This report may not be reproduced, distributed or further published by any person without the written consent of City National Bank. Please cite source when quoting.
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