The Week Ahead: A Stable Imbalance

Foreign Exchange: The Week Ahead
A Stable Imbalance
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Andrew Kositkun
Andrew Kositkun
Foreign Exchange Head Trader
The recent flare up between the US and Iran notwithstanding, geopolitics over the past couple of decades have actually been quite stable.  For context, the Thirty Years’ War between 1618 and 1648 was one of the most devastating conflicts in history.  Initially, it began as a religious conflict but eventually morphed to a greater power struggle. 

In total battles, plagues and famine claimed about 8 million lives.  Ultimately the fighting ended with the Treaty of Westphalia that established concepts including sovereignty, peaceful co-existence of nations without interference in domestic affairs as well as the use of diplomacy to resolve conflicts.    

However, recent geopolitical stability doesn’t mean that the world has reach an equilibrium.  China’s emergence, the rise of nationalism and de-globalization all illustrate that conventions that the world operates under are continuously being put into question.  As a result, globalization, which was a powerful force holding the global community together the past two decades, has dropped well off levels seen before the Great Financial Crisis. 

This matters because globalization not only tends to be one of the most powerful growth drivers but also because global economic uncertainty still sits around its highest level in 3 decades.  These factors, in addition to others, have kept central banks from being able to normalize interest rates.  While the US-Iran conflict appears to be fading to the back, geopolitical uncertainty outside the Middle East and uninspiring growth still remain.  This means that we should expect the status quo of stable disequilibrium to persist.

FORECASTS

EUR

Last week’s economic data out of Germany shows that the Eurozone’s largest economy continues to struggle to regain its footing.  Given this, the longer term outlook for the euro to move higher by the end of the year remains in place.  Last week’s US jobs report supports the view that the US economy is slowing.  While the European economy is still expected to grow slower than the US economy, the gap should shrink and support the undervalued euro.    

GBP

The Brexit Withdrawal bill finally passed the Commons and will move to the Lords on Monday.  Passage through the Lords is likely just a formality, leaving the main theme in 2020 to be the evolution of the free trade talks with the EU.  The GBP has traded in the 1.30-1.33 range on the interbank markets and there doesn’t appear to be any catalysts to suggest this range gets broken.

JPY

USDJPY finished the year higher as US-Iran tensions pulled back and the US and China are set to sign their Phase 1 trade deal this week.  With the Fed looking comfortable with where rates are and the BoJ on the sidelines as it monitors the impact of fiscal stimulus, except USDJPY to continue to trade in its recent range. 

CAD

Since November 2019, the CAD has strengthened sharply.  While last week’s jobs report beat estimates, there likely was some payback from last month’s poor report.  Given this, the overall economic data picture has deteriorated and the recent run of Canadian strength appears overdone.   Should the BoC make a dovish pivot, USDCAD could be vulnerable to a sharp spike given current market rate cut pricing, making incoming data such as Monday’s BoC Business Outlook Survey important.

CNY

The CNY has continued to strengthen on the back of additional Chinese stimulus and an easing of US-China trade tensions.  The Phase 1 deal between the US and China is expected to be signed this week.  With details still vague, it remains to be seen how ceremonial or substantial the deal actually is.  While the most important trade issues between the US and China remain unresolved, the belief is that the US will not escalate tensions again ahead of the 2020 election.  Expect stability for the CNY.

AUD

The AUD ticked up sharply at the end of last week on the back of a blockbuster retail sales report.  However, timing considerations and one off factors suggest there could be a sharp reversal for the next retail sales print.  Overall the Australian economy remains soft with work left to do on the RBA’s inflation and employment targets.  Additionally ,  the bushfire crisis adds additional economic headwinds.  The RBA reconvenes in February to reassess the economy and the belief is that cuts could come sooner rather than later.  Until then the bias is to be short AUD.        

MAJOR CENTRAL BANK ACTIVITY THIS WEEK

1/16 South Korea Expectations for rates to be unchanged at 1.25%

KEY MARKET MOVING ECONOMIC RELEASES

United States and Canada

1/14 US CPI MoM Expectations for a 0.2% increase
1/15 US PPI MoM Expectations for a 0.2% increase
1/15 US Retail Sales MoM Expectations for a 0.3% increase

Europe/Eurozone 

1/15 EZ Industrial Production Expectations for a 0.3% increase
1/17 EZ CPI MoM Expectations for a 0.3% increase
1/13 UK Industrial Production MoM Expectations for 0.0% print
1/15 UK CPI and PPI MoM Expectations for a 0.2% and 0.1% increase, respectively
1/17 UK Retail Sales MoM Expectations for a 0.6% increase
1/15 German GDP YoY Expectations for a 0.6% increase

Asia/Japan, and New Zealand 

1/13 Chinese Trade Balance Expectations for a $45.7 billion print
1/16 Chinese Industrial Production YoY Expectations for a 5.9% increase
1/13 Japanese Current Account Balance Expectations for a 1,786 billion yen print
1/15 Japanese PPI YoY Expectations for a 0.9% increase
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