Morning Commentary: Finding Clarity

Foreign Exchange - Morning Commentary

Finding Clarity

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Andrew Kositkun
Andrew Kositkun
Foreign Exchange Head Trader
The longest shutdown in US history has finally ended, at least temporarily, through a temporary funding bill that will keep the government open through February 15.  If Republicans and Democrats are unable to find a border solution during this three week period, President Trump has indicated he is willing to reclose the government or use his emergency power to build the wall.  All of which is to say that things are far from settled and Washington D.C. discord remains high. 
For now, however, the markets should be focused on other issues.  In the US, economic data should start flowing again in full force as the government agencies responsible for collecting and publishing these data points get back to work.  Additionally the markets will be focused on earnings (global industrial bellwether Caterpillar Inc. reported disappointing results), the FOMC meeting and the all-important non-farm payroll report Friday in order to gain clarity on the direction the economy is heading.  With regards to the FOMC, no change is expected to rates however there are expectations for changes to the language of the statement to acknowledge the increased risk to the economy.  This would be a dovish change but not necessarily new news. 
Additionally, and more significantly, it has been reported that the committee could be close to ending its balance sheet normalization program with a larger balance than previously expected.  When QT was launched, the range of estimates of the balance sheet at the end of QT was from $1.5 trillion to $3.5 trillion with the markets splitting the difference and expecting a $2.5 trillion ending balance.  According to the WSJ, the FOMC is moving towards a quicker ending of its program with balances expected to be on the higher end of the range.     
  • In the U.K., parliament will hold another round of votes on Brexit tomorrow, this time it will be on amendments.  The two amendments that matter are the Yvette Cooper amendment (makes extension to Article 50 likely) and the Murrison and/or Brady amendment (requires changes to the Irish backstop). 
  • The next round of US-China trade talks are scheduled to kick off on Wednesday in Washington with Vice Premier Liu expected to meet with USTR Lighthizer and Treasury Secretary Mnuchin.  As a reminder, the last round of talks in China were extended a day and seen as positive by the markets.   
  • Weak economic data continued out of China with the country reporting industrial profits fell 1.9% year over year in December, extending the November slide of 1.8%.  This marks the first back to back slide since 2015.
  • Paychecks for federal employees who worked through the shutdown, as well as those furloughed, should go out Friday.  Until then, federal employees will continue to work without pay.
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