The Week Ahead: Darkest Before the Dawn

Darkest Before the Dawn Share this story: Andrew Kositkun Foreign Exchange Analyst Heading towards the end of the year, three key risks have emerged as focal points for the markets.  These risks are a fiscal crisis in Italy, a no-deal Brexit and trade conflict escalation between the US and China.  Certainly none of these issues have simple answers and given that markets have proven to be sensitive to headlines, things are more likely than not to deteriorate further.  However, ultimately there appears to be a path towards a resolution to all of these issues.  In Italy, the government extended an olive branch to the EU and revised down its projected deficit after receiving pushback from European officials.  While the revised projections are likely to be unacceptable to the EU, the Italian government has shown a greater willingness to negotiation than its rhetoric would suggest.  A similar story exists in the UK where another round of efforts has kicked off in hopes of achieving a breakthrough.  Both the UK and the EU have shown increased flexibility on redline issues, indicating a desire on both sides to avoid a no-deal conclusion and negotiate.            Finally in the US, a surprise NAFTA breakthrough could be interpreted as a sign that the US wants to avoid a trade war.  While the issues between the US and China are different and much more complicated than those between the US and Canada/Mexico, the US has shown a willingness to compromise on extreme demands if the counterparty is also willing to concede.  On this front, China has much to offer: reducing non-tariff barriers, opening up to investments and ending intellectual property right violations, all of which are also EU demands.        MAJOR CENTRAL BANK ACTIVITY THIS WEEK 10/8 Israel Expectations for rates to remain unchanged at 0.10% 10/11 Peru Expectations for rates to remain unchanged at 2.75% KEY MARKET MOVING ECONOMIC RELEASES United States and Canada 10/10 PPI Expectations for a gain of near 0.2%; YoY stays at 2.8% 10/11 CPI Expectations for a gain of 0.2%; YoY to drop to 2.4% Europe/Eurozone 10/12 EZ Indust. Product. Expectations for a gain of 0.3% following a -0.8% print 10/11 German CPI Expectations for a gain of 0.4%; YoY to 2.3% 10/10 U.K. Trade balance Expectations for another large trade deficit 10/10 U.K. Indust. Product. Expectations for a gain of 0.1%; YoY rises to 1.0% Asia/Japan, and New Zealand 10/11 China Trade Balance Expectations for another large trade surplus 10/8 Japan Trade Balance Expectations for a smaller trade surplus 10/10 Japanese PPI Expectations for a gain of 0.2%;YoY declines to 2.9% FORECASTS EUR The combination of strong U.S. economic data and surging U.S. interest rates and larger than expected Italian budget deficits surprising the market sent the euro tumbling over the past 10 days. The euro has found some near term stability as the market has priced in enough good U.S. news and negative EU/Italian friction for now. It appears to be a quiet week ahead as there is a lack of key economic data or central bank meetings – expect some consolidation ahead with a bias toward a weaker euro. GBP The GBP has largely mirrored the euro's performance against the U.S. dollar, but the GBP has clearly been outperforming the euro over the past ten days so the GBP has only weakened marginally against the U.S. dollar. Continued headlines about the Brexit negotiations and PM May's standing within the Tory party continue to cause volatility and uncertainty. Expect more of the same this week.   JPY Since the beginning of September, the Japanese yen has been the weakest of the major Asian currencies only surpassed by the Indian rupee. Besides the sharp ramp up in U.S. interest rates, markets continue to be concerned about a long and drawn out U.S. – China trade war that will negatively ripple through Asia. In addition, anxieties about a U.S. – Japanese summit concerning Japan’s persistent trade surplus with the U.S. is hurting sentiment. CAD The CAD has had a mixed week initially appreciating on the back of the negotiated settlement surrounding the new NAFTA agreement between the U.S. and Canada and then weakening as a surge in U.S. interest rates outpaced gains in Canadian interest rates. Expect sideways trading this week, but the removal of uncertainty surrounding U.S. – Canada trade is a big positive and paves the way for further Bank of Canada rate increases and a stronger CAD. CNY The CNY continues to consolidate but remains vulnerable to further weakness. Another ultra-large U.S. trade deficit with China only adds more fuel to the bonfire of trade tensions. The new NAFTA agreement potentially provides a template for negotiations with the EU and ultimately to confront China about trade abuses. The ripple effect from a slowing China could continue to impact Asian equities and currencies for the medium term.   AUD The AUD and NZD continue to plummet reflecting the ongoing concerns about a Chinese economic slowdown and the potential ripple effect of downsized supply chains and reduced demand for imports by China. In addition, U.S. interest rate differentials have surged in favor of the U.S. dollar adding more downside pressure. Both currencies made new yearly lows this week and are revisiting lows not seen since 2016. Expect some consolidation with bias toward weakness. 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! 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