The Week Ahead: “Those Who Cannot Remember the Past Are Condemned to Repeat It”

Foreign Exchange - The Week Ahead
"Those Who Cannot Remember the Past Are Condemned to Repeat It"
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Alan Rose
Alan Rose
Foreign Exchange Head Trader
As we enter the September and October months, it is good to remember that these two months have witnessed turbulent times for the markets based over our long term economic and financial history. While U.S. equities have largely shrugged off any and all negative news so far this year, powered by a strong U.S. economy and earnings, there remain many unresolved issues that could become critical factors as we approach the key U.S. November elections.
Any number of these issues could derail U.S. and global equities and ultimately cause our economy to weaken and spill out into all other asset classes. We have cited a number of these issues in our daily commentary, but they include the bare-knuckle trade tactics and protectionism by the White House, political turbulence in the White House and Washington, emerging market turmoil, Fed interest rate policy, geopolitical issues etc. etc.
September has been the worst-performing month for the Dow Jones Industrial average for the past 50 years. October is particularly noteworthy regarding the U.S. stock market. Epic crashes have taken place in October beginning with the Wall Street Panic of 1907, the stock market crash leading up to the Great Depression in 1929, and the crash of October 19, 1987 when equities lost nearly 25% of their value in a single day!
Hope for the best, but plan for the worst.
Major Central Bank Activity This Week
9/13 United Kingdom Expectations for rates to remain unchanged at 0.75%
9/13 ECB Expectations for rates to remain unchanged at 0.00%
9/14 Russia Expectations for rates to remain unchanged at 7.25%
Key Market Moving Economic Releases
United States
9/12 PPI Expectations for gains of nearly 0.2%; YoY at 3.2%
9/13 CPI Expectations for a gain of 0.3%; YoY at 2.8%
9/14 Industrial Production Expectations for a gain of 0.3% after a gain of 0.1%
9/12 EZ Industrial Prod. Expectations for a decline of 0.5% after a -0.7% print
9/11 German ZEW Survey Expectations for a decline from 72.6 to 72.0
9/12 Germany CPI Expectations for a gain of 0.1%; YoY remains at 2.0%
9/10 U.K. Trade Balance Expectations for another large trade deficit
9/10 U.K. Industrial Prod. Expectations for a gain of 0.2% after a gain of 0.4%
9/11 U.K. Jobs Report Expectations for the UR to remain at 4.0%
Asia/China and Japan
9/13 China Industrial Prod. Expectations for a gain of 6.2%
9/12 Japanese PPI Expectations for a gain of 0.1%; YoY at 3.1%
9/13 Japanese Ind. Prod. Expectations for another sizeable surplus
9/12 Aussie Jobs Report Expectations for a gain of 18k; UR to remain at 5.3%
Despite weakening EZ data and rising U.S. interest rates relative to EZ rates, the euro has displayed some amazing resiliency. Market psychology and positioning is playing a role in supporting the euro as the market has moved back into short euro positioning. Recent emerging market stability has also helped to support the euro, but emerging market stability is fragile. We continue to expect more range trading this week with a slight downward bias.
The GBP continues to consolidate and has shown some near term stability. Brexit negotiations remain key for the GBP over the short and medium term. Expect more sideways trading and for the GBP to largely mirror movements in the EUR.
The JPY remains trapped in a multi-week trading range. It is very difficult to predict the next secular move as there are numerous factors that continue to cause this currency to move within very short term cycles dependent upon "risk-on" or "risk-off" market psychology, emerging market volatility, U.S. interest rate movements, geopolitics, etc. Expect more sideways trading next week and rapid changes in sentiment.
The CAD has weakened as have many other commodity-linked currencies over the past two weeks. While weaker against the USD, the CAD has been strengthening against the AUD, MXN, NZD, and NOK. Ongoing concerns surrounding the NAFTA negotiations and emerging market volatility have been the driving force behind this recent weakness. Expect a steady to slightly weaker CAD this week.
After weakening sharply in June, July, and early August, the CNY has stabilized within a narrow range. Recent emerging market stability has played a role in this consolidation but markets remain on edge in general and sentiment is fragile. The potential for more U.S. tariffs on Chinese goods could spark another leg lower in the CNY and other Asian and emerging market currencies.
The AUD remains very weak and vulnerable to all negative news related to Chinese tariffs and emerging market volatility. The Reserve Bank of Australia remains on hold and recent domestic politics have also hurt sentiment. The Aussie is one of the weakest commodity currencies linked currencies this year down by near 9% and is sitting at its yearly low. Momentum remains key; expect a steady to weakening AUD next week.
Five-Day Change in the Value of Major Currencies
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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. The 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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