The Week Ahead: Crossing the Finish Line…Kinda

Foreign Exchange: The Week Ahead
Crossing the Finish Line…Kinda
Share this story:
Andrew Kositkun
Andrew Kositkun
Foreign Exchange Head Trader
After voting to leave the EU over three and a half years ago, the UK will finally leave the EU on Friday, January 31.  Even though the UK will no longer be part of the EU, little will actually change as the UK will enter a transition period that is scheduled to last until the end of 2020.  During this period, the current trading relationship will remain as the two sides negotiate a new one.  It is this impending negotiation that should remind market participants that the UK’s January 31 exit from the EU is more the start of the race than the finish. 

While the pound is down from its post-election high, it is still significantly higher than where it was prior to the election.  This price action illustrates the market’s increasingly positive outlook that some may consider complacency.  We acknowledged that a higher pound is warranted given that the Conservative’s large majority eliminated political paralysis and a cliff edge exit, but the assumption that trade talks will go smoothly and the GBP will return to historical levels is too optimistic.  Obstacles to striking a deal include the clear complications to negotiating a trade deal this size as well as a Brexit process that has shown politics dominating rational thinking. 

To this point, the UK government continues to insist that it will stick to its pledge to leave the EU by December.  This pledge seems impossible to achieve without the UK government reversing its position against having a close relationship with the EU.  As such, markets are faced with the return of cliff-edge deadline in 2020. 

For now, the markets appear to be looking past the transition period and giving PM Johnson the benefit of the doubt.  GBP volatility has begun to normalize, leaving UK fundamentals, the Bank of England, and global growth to move forward as drivers of the currency.  However, as we move through the year, expect the Brexit cliff edge theme to reemerge.  After all, despite the UK’s exit, we are closer to the beginning than the end.    



Last week’s ECB meeting was a non-event and PMI data, while showing a divergence between core and peripheral economies, continues to support the idea that manufacturing is recovering but was soft on the composite level.  The hope is that trade peace will allow this momentum to continue.  Eurozone growth remains well below potential, but hopefully the worst is over with the economy stabilizing.  Near term further euro weakness is possible as European growth has stabilized but remains unconvincing.  Longer term, the bias remains for the euro to move higher.    


GBP volatility have begun to normalize meaning fundamentals, and not Brexit, have started to take control of the currency.  PMI data last week was positive.  PMI data combined with the expectation for fiscal stimulus is likely enough for the BoE to conserve the limited number of cuts it has left.  However, recent BoE communication suggests the BoE is preparing to cut and this is likely why market pricing for a cut is as high as it is.  While scope remains for the GBP to move higher should the market pull back on BoE expectations/the bank remains on hold, the overall economy remains uncertain which should pressure the GBP.


The yen has strengthened back towards where interest rate differentials would imply as Japanese investment outflows have tapered and concerns over the coronavirus build and increase the pricing in of risk premium.  The BoJ also met, but it was a non-event.  Expect USDJPY to continue to range trade with a bias for USDJPY lower as coronavirus concerns increase as Lunar New Year travel increase the chance of it spreading.


The Bank of Canada caught the markets off guard with its dovish hold last week.  By removing the word “appropriate” from its assessment of the current policy rate, the BoC put the possibility of easing back on the table.  Because of this, incoming data has become increasingly important with focus on Friday’s November GDP number.  This report will be the week’s key data release and give insights into the BoC next move.  Until then, expect markets to sell into CAD strength. 


The coronavirus outbreak has dominated the headlines.  While the Chinese government has been more transparent and responsive to this outbreak, relative to past episodes, concerns of the virus spreading remain.  For scope, over 3 billion trips are expected to be taken during the Lunar New Year travel period.  Using past outbreaks as a guideline, it will likely take months before authorities are able to gain control of the outbreak.  The economic fallout is expected to be material but transitory.  As such, scope remains for the CNY to weaken although overall stability is expected.  


The overall picture remains unchanged for the Aussie.  The domestic economy remains challenged and the bushfire crisis as well as the coronavirus outbreak add additional headwinds.  The RBA is scheduled to review the economy when it reconvenes in February, making upcoming data releases more important than usual.  To this point, last week’s job’s report showed continued labor market softness with part-time employment making up the entire gain.  The bias remains for AUD lower.  


1/29 US Expectations for rates to be unchanged at 1.75%
1/30 UK Expectations for rates to be unchanged at 0.75%


United States and Canada

1/27 US New Home Sales MoM Expectations for a 731k print
1/28 US Durable Goods Orders Expectations for a 0.9% increase
1/28 US Consumer Confidence Expectations for a 128.0 print
1/30 US Q4 GDP Expectations for a 2.2% advanced print
1/31 Canadian Nov. GDP Expectations for a flat print


1/30 EZ Unemployment Rate Expectations for the rate to remain steady at 7.5%
1/31 EZ Q4 GDP Expectations for a 0.2% QoQ advanced print
1/31 EZ CPI Expectations for a 1.4% YoY print
1/27 German Business Climate, Current Assessment and Expectation  Survey Expectations for a 97.0, 99.1 and 94.9 print, respectively
1/30 German Unemployment Rate Expectations for the rate to remain unchanged at 5.0%
1/31 Brexit The UK officially exits the EU

Asia/Japan, and New Zealand 

1/30 Chinese Manufacturing PMI Expectations for a 50.0 print
1/30 Japanese Jobless Rate Expectations for the rate to increase by 0.1% to 2.3%
1/30 Japanese Industrial Production Expectations for a 0.7% MoM increase
1/28 Australian Q4 CPI Expectations for a 0.6% MoM print

If we can help you with any Foreign Exchange needs, please email or call (800) 447‑4133.
Want to learn more about international finance, economics, and global events? Sign up for our other Foreign Exchange emails and videos!
Follow City National Bank on social media:
Facebook Twitter LinkedIn Google Plus YouTube
Non-deposit investment products:
Are not FDIC insured,
Are not deposits or other obligations of City National Bank and are not guaranteed by City National Bank, and
Are subject to investment risks, including possible loss of the principal invested.
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.
Unsubscribe from this list  |  Update email preferences
This message has been sent to Please do not reply to this email. To ensure the delivery of future emails, please add to your email address book or safe sender list.
Copyright ©2020 City National Bank – All Rights Reserved.
350 South Grand Avenue, 12th Floor, Los Angeles, CA 90071
City National Bank is a subsidiary of Royal Bank of Canada.
Equal Housing Lender
NMLSR ID# 536994 | City National Bank Member FDIC


Popular posts from this blog

Acquisitions or Alliances: What's Your Growth Strategy?