The Week Ahead: It’s All Golden

Foreign Exchange: The Week Ahead
It’s All Golden
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Andrew Kositkun
Andrew Kositkun
Foreign Exchange Head Trader
Japan heads off to its Golden Week holiday next week which, from a currency point of view, puts the yen at risk for idiosyncratic strengthening.

Strong demand for foreign assets by Japanese investors has been key driver for USDJPY with the associated yen-selling muting moves towards yen strength.  The persistence of this demand can be seen through fund flows during the current crisis.  Historically, Japanese investors have repatriated funds during global market downturns.  However, this time around the bias still remains towards the accumulation of global assets as domestic returns remain very low.  Nevertheless, the next couple of weeks are setting up to put a dent in investment outflows.

Golden Week has traditionally been a period of outflows.  Combined with this year’s “voluntary” lockdown in Tokyo, there will likely be a larger than normal decline in investment outflows over the next two weeks.  Moreover, Japan is experiencing a surge in second wave infections similar to Singapore.  With “voluntary” lockdown measures dropping activity in Tokyo by less than in NY, London and Singapore where there are tougher guidelines, the risk is for a further drop in activity should stricter guidance be imposed.

This could impact flows in two ways.  Golden Week tends to result in declining flows during the holiday period followed by a sharp rebound afterwards.  Should the holiday be extended or if there is further tightening of social distancing measure, the risk is for a sharper drop in investment outflows and a more modest rebound post-holiday.  Without these outflows, USDJPY would be losing a key factor pushing against declines

FORECASTS

EUR

As expected, EU Leaders have endorsed a €540bn package of short-term emergency measures agreed to by the Eurogroup to support the most vulnerable member states.  Unfortunately, the leaders were unable to come to an agreement on the European Recovery Fund as they kicked the can down the road.  The dichotomy between the strength of the US’ stimulus response and the EU’s weaker one is a key reason why the US economy should bounce back stronger.  The bias remains to sell rallies with the expectation for month end flows to add noise to price action. 

GBP

After the sharp selloff at the beginning of last week, the GBP spent the remainder of the week consolidating.  While the UK’s stimulus response has been impressive, this has been balanced out by economic data series that continue to show how stark the current economic picture is.  The latest round of Brexit talks concluded last week and is set to resume early May.  There has been no material progress made with both sides still far apart.  Rising budget deficits, weak growth, additional QE and difficult Brexit negotiations all bias GBP lower.

JPY

The yen spent last week broadly range bound as risk sentiment ebbed and flowed.  Negative news around drug trials, Europe’s inability to wrap up a stimulus package, and overall weak data hang over the markets ahead of the Bank of Japan meeting this Monday.  Headlines suggest the BoJ will discuss unlimited bond buying but this isn’t a notable change.  Purchase amounts are already driven by YCC and can already be conducted at an unlimited amount.  With Japan heading into Golden Week, expect volumes to drop with a bias for yen strength.

CAD

The loonie was range bound last week and has held up relatively well despite the fall in crude prices.  While the relationship between crude and USDCAD has weakened, oil prices still provide a long term anchor for the currency.  Ultimately, the Canadian economy relies on oil and services.  As such, the expectation remains for the currency to adjust towards the level in oil as lower crude prices hit the oil sector and lockdown measures hit services.

CNY

Reports continue to point to a normalization of economic activity in China with PMI data this week providing the next data point.   However, the virus continues to spread in other parts of Asia, Europe and North America which will result in a demand shock and mute the pace of China’s recovery.  Specifically on Asia, a second wave of infections are becoming an increasing concern especially in Japan and Singapore.  Continue to expect currency stability as this is what the PBoC aims to achieve. 

AUD

The AUD continues to hold up well despite other commodity currencies in the G10 continuing to being hit.  Partly this relates to iron ore prices holding up better than crude, but it also has to do with Austria’s relative performance.  COVID-19 statistics have held up better in Australia relative to its peers, suggesting that the country could normalize sooner.  Moreover, Australia’s stimulus response, as a percentage of GDP, also outperforms its peers.  Virus news should continue to be a key driver, but expect the AUD to remain supported.

MAJOR CENTRAL BANK ACTIVITY THIS WEEK

4/26 Japan Expectations for rates to remain unchanged at -0.10%
4/26 US Expectations for rates to remain unchanged at 0.25%
4/30 EU Expectations for rates to remain unchanged at -0.50%

KEY MARKET MOVING ECONOMIC RELEASES

United States and Canada

4/28 US Consumer Confidence  Expectations for an 87.2 print
4/29 US Q1 Annualized GDP QoQ Expectations for a -3.8% decline
4/30 US Initial Jobless Claims Expectations for 3.5 million jobless claims
5/1 US Manufacturing PMI Expectations for a 36.7 print
4/30 Canadian Feb MoM GDP Expectations for a 0.1% increase

Europe/Eurozone 

4/30 EU Unemployment Rate Expectations for a 7.7% print
4/30 EU Q1 GDP QoQ Expectations for a -3.5% decline  
4/30 EU CPI MoM Expectations for a 0.1% increase 

Asia/Japan, and New Zealand 

4/29 Chinese Manufacturing and Non-manufacturing PMI Expectations for a 51.0 and 52.8 print, respectively 
4/27 Japanese Jobless Rate Expectations for a 2.5% print 
4/29 Japanese Industrial Production MoM Expectations for a -5.0% decline
4/28 Australian CPI QoQ Expectations for a 0.2% increase
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