The Week Ahead: Silence is Deafening

Foreign Exchange: The Week Ahead
Silence is Deafening   
Share this story:
Facebook
Twitter
LinkedIn
Email
Andrew Kositkun
Andrew Kositkun
Foreign Exchange Head Trader
The re-escalation in US-China tensions have casted a cloud over the markets and raised fears of a faster decoupling of the two economies.

One of the more interesting aspects of this most recent round of tensions has been China’s restrained response, at least as of this writing.  This measured response from China contrasts sharply with China’s strategy at the beginning of the trade war as it used measures including tariff hikes and tech bans.

The key question is why the Chinese have been so calm.  One possibility is that China may be waiting for the right time to retaliate.  It would seem that China has incentives to wait until just months before the US election to reengage in the trade war.

Alternatively, the behind the scenes bilateral relationship might actually be benign and the saber rattling just political theater.  Strong rhetoric is good politics, but actual escalation of the trade war and the resulting economic shock is politically harmful, especially in an election year.  Both sides indicate that they want the Phase 1 deal to work so it is possible that this is all just politics.

Regarding the Phase 1 deal, questions still remain around China’s ability to meet its obligations.  Even before COVID-19, it appeared to be a significant challenge for China to hit its purchase targets, but markets assumed Trump would let it slide to avoid escalation ahead of the elections.  Clearly with the pandemic driving a deep recession, it is almost impossible for China to hit its quota.  This is due to both a drop in Chinese demand and disruptions to the US supply chain.

While China will miss on the overall target, expect certain categories to do better than others.  The drop in energy prices makes hitting the energy target difficult.  However, there is a strong incentive for China to make a push on agricultural goods.  Agricultural goods are commodities so their prices tend to converge across regions.  Because of this, China should be able to shift to US goods without much of a premium.  Critically, by buying agricultural goods from states that support Trump, and increasing those state’s reliance on China, it will give China a stronger hand in the next trade or tech escalation.

For now, the most likely scenario is for continued noise around the US-China relationship with escalation coming after the election.  But 2019 has shown economic logic to be a poor predictor of US-China relations.  This leaves the possibility that the US could review the Phase 1 deal or China could retaliate before the elections.

FORECASTS

EUR

Eurozone PMI prints point to a slowdown in economic contraction in May but still indicated a contraction nevertheless.  The euro received a boost after Merkel/Macron caught the markets off guard with their EU500 billion proposal despite the lack of confirmation that the French/German plan will be implemented.  On the other hand, US-China tensions continue to increase and weigh on the markets.  Overall, the picture remains unchanged.  As long as Europe lacks a unified fiscal response, its rebound should be less strong relative to the US’s rebound and this will pressure the euro although hopes for a European Recovery Fund breakthrough could provide some support.

GBP

The bias on cable remains bearish.  Bank of England officials continue to take a very dovish tone.  BoE Governor Bailey has not ruled out negative rates and acknowledged that the bank is examining just what its lower bound for rates might be.  Moreover, Bailey admitted that his position on going negative has changed since entering the pandemic, but noted that negative rates have received “pretty mixed reviews” elsewhere.  As with other countries, COVID-19 issue are pressuring the domestic economy as the poor retail sales numbers show.  But unlike other countries, the UK also has Brexit issues with both sides still far apart.  The deadline to ask for an extension is at the end of June.  With the UK maintaining it won’t ask for an extension, hard Brexit risks are becoming increasingly material.

JPY

USDJPY has been broadly range bound since the middle of May.  Recent flow data shows that Japanese investors net sold foreign bonds again.  Excluding Golden Week, Japanese investors have net sold foreign bond holdings every week since the first week of March.  This reduces a factor that has been supporting USDJPY.  The BoJ’s emergency meeting came and went with no surprises.  As expected, the BoJ set up a lending facility for SMEs with no impact on the currency.  Market sentiment-wise, US-China tensions continue to ratchet up.  So far China’s response has been measured, but once the National People’s Congress this weekend is over, the risk is for China’s pushback to be more forceful and support safe haven demand.

CAD

The CAD’s relatively measured weekly move masks decent intra-week volatility.  Risk on and rising oil prices helped the CAD initially strengthen but selling interests (CAD outlook remains weak) and US-China tensions eventually brought CAD weakness.  Monetary policy-wise, BoC Governor Lane expressed the view that 0.25% is the BoC’s lower bound and that further cuts were not advisable.  Instead, the onus remains on fiscal policy for further support.  USDCAD has been in a 1.38/1.42 range in the interbank market and nothing indicates this won’t continue.

CNY

US-China tensions continue to hang over the markets and, if anything, have gotten worse.  There are two points of view on US-China tensions.  A weak global economy and a weakened US economy suggest that the US would be hesitant to escalate tensions.  However, growing anti-China sentiment among both Republican and Democrats as well as proximity to the US election flags the risk for escalation.  Domestically, China’s response has been measured, but this could change once we get past this weekend’s National People’s Congress.  If rhetoric turns action, expect it to be USD bullish and CNY bearish.

AUD

The broad story remains the same with the Aussie remaining beholden to equities with local data prints resigned to a secondary tier.  Equities appear to be stretched although there is a lack of conviction in either direction.  Given this, US-China tensions have taken a step up.  Tensions over Hong Kong have added to rhetoric over the origins of the coronavirus among other things.  So far, China’s response has been relatively muted, but this could change after this weekend’s National People’s Congress which is negative for risky assets.  Moreover, Australia and China have their own tensions.

MAJOR CENTRAL BANK ACTIVITY THIS WEEK

5/25 Israel Expectations for rates to remain unchanged at 0.10%
5/27 South Korea Expectations for a 0.25% rate cut to 0.50%

KEY MARKET MOVING ECONOMIC RELEASES

United States and Canada

5/28 US GDP Q1  Expectations for -4.8% decline
5/28 US Initial Jobless Claims Expectations for 2 million claims
5/28 US Durable Goods Expectations for a -20.0% decline
5/29 US Consumer Sentiment Survey Expectations for a 74.0 print
5/29 Canadian March GDP MoM Expectations for a -9.0% decline

Europe/Eurozone 

5/28 EZ Economic Confidence Expectations for a 70.7 print
5/25 German Business Climate, Expectations and Current Assessment Survey Expectations for a 78.4, 75.0 and 80.0 print, respectively

Asia/Japan, and New Zealand 

5/28 Japanese Jobless Rate Expectations for a 2.7% print
5/28 Japanese Retail Sales MoM Expectations for a -6.8% decline
5/28 Japanese Industrial Production MoM Expectations for a -5.3% decline
If we can help you with any Foreign Exchange needs, please email foreignexchange@cnb.com 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 bank@banking.offers.report. Please do not reply to this email. To ensure the delivery of future emails, please add foreignexchange@emails.cnb.com 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.
TERMS & CONDITIONS  |  PRIVACY STATEMENT
Equal Housing Lender
NMLSR ID# 536994 | City National Bank Member FDIC
                                                           

Comments

Popular posts from this blog