The Week Ahead: Relationship Status: It’s Complicated

Relationship Status: It's Complicated Share this story: Andrew Kositkun Foreign Exchange Head Trader The USD finished lower last week and is now lower for the year.  A dovish pivot from the Federal Reserve has helped weaken the dollar, but an increase in political discourse in Washington D.C. has also warranted a pricing in of a dollar discount.  Also adding to the negative sentiment is the arrest, by Robert Mueller, of Roger Stone, a longtime advisor to President Trump. While the temporarily suspended government shutdown is a concern, the implications this political dysfunction sends about the governing relationship between a divided Congress, the White House and the ability for the government to produce policy as required is arguably more concerning.  Exacerbating the situation is the fact that legislative dysfunction is happening at a time when US economic momentum is fading.  Specifically, the markets are focusing on the ratification of NAFTA 2.0 (USMCA) and the raising of the debt ceiling later this year.  Looking first at the impending debt ceiling debate, the fear is that policy gridlock will negatively impact spending/fiscal prudence and lead to an inevitable standoff over the debt ceiling that could lead to a fiscal accident and a sovereign ratings downgrades, which would only accelerate diversification out of the USD and into other reserve currencies.  With regards to NAFTA 2.0, it is increasingly likely that the Democrats would seek to delay ratification.  Besides seeking material changes to the agreement to address areas of concerns, the level of animosity between the parties give us little reason to believe the Democrats will want to help the president finalize a signature policy achievement especially given the options available to push ratification well into 2019.  Adding further pressure to the situation is the president's ability to unilaterally withdraw from NAFTA 1.0, as he has previously threatened, to counter Democratic delay tactics.  Doing so will start a 6 month clock that forces ratification of NAFTA 2.0 or a crash out similar to Brexit that would disrupt supply chains and investments.  Clearly, this would be negative for the US but such is the current state of politics.    MAJOR CENTRAL BANK ACTIVITY THIS WEEK 1/29 Hungary Expectations for rates to remain unchanged at 0.90% 1/30 United States Expectations for rates to remain unchanged at 2.50% 1/30 Chile Expectations for rates to rise from 2.75% to 3.00% 1/31 Colombia Expectations for rates to remain unchanged at 4.25% KEY MARKET MOVING ECONOMIC RELEASES United States and Canada  1/28-2/4 New Home Sales Expectations for a gain from 544k to 567k 1/28-2/4 Factory Orders Expectations for a gain of 0.3% following a -2.1% print 1/28-2/4 Durable Goods Orders Expectations for a gain of 0.8% matching previous gain 1/28-2/4 Trade Balance Expectations for another large trade deficit 1/30 ADP Employ. Report Expectations for a gain of 178k following a gain of 271k 2/1 Jobs Report Expectations for a gain of 160k following a gain of 312k 1/31 Canada GDP Expectations of a decline of 0.2% following a 0.3% gain Europe/Eurozone 1/31 EZ Jobs Report Expectations for the UR to remain at 7.9% 1/30 German CPI Expectations for a decline of 0.8%; YoY drops to 1.6% 1/31 German Jobs Report Expectations for the UR to remain at 5.0% Asia/Japan, and New Zealand 1/30 China Manuf. PMI Expectations for a decline from 49.4 to 49.3   1/30 Japan Indust. Product. Expectations for a decline 0f 0.5% after a 1.0% decline   1/28 New Zealand Trade Expectations for an improvement to a small trade surplus   FORECASTS EUR The EUR has continued to consolidate largely between $1.1300 and $1.1500 since the middle of November and this past week, it respected this range.  Short term trends alternate between a bullish and bearish bias; most recently, the euro has been weakening.  Given a dovish ECB last week and continuing weakness in economic data, we expect this to continue.   GBP The GBP was the top performing G10 currency last week as markets continue to price out the chances of a hard Brexit and price in the prospects of an Article 50 extension or second referendum.  Additionally, reports that the DUP will support PM May's Plan B school gave the GBP a sharp boost to finish the week.  While our base case remains for the passage of a Withdrawal Agreement, it appears we may be getting too optimistic about a deal or an extension, which should limit the upside until further concrete progress.  Expect a steady and range bound GBP this week subject to headline risks. JPY The JPY finished last week as one of the worst performing G10 currencies.   BoJ commentary out of its most recent meeting was dovish with downward revisions to inflation forecasts notable for their magnitude as well as low end points.  Countering these weakening factors have been concerns about global growth and political discourse in Washington D.C.  Expect consolidation with USDJPY struggling to break 110 or move sustainably lower this past week. CAD RBC, our mothership, had forecast a range for the CAD for Q1 of 1.3600/$ to 1.3100$...we congratulate them on picking a top when it appeared that further CAD weakness was on the horizon. Since the correction lower in the USD/CAD, the CAD has been trapped between 1.3200 and 1.3300 over the past two weeks. Expect more sideways trading this week. CNY The CNY has been benefiting from a number of fronts since the beginning of the year. The Chinese government and central bank have been using all monetary and fiscal means possible to keep the economy liquid and afloat. Continued positive expectations surrounding a successful conclusion to the U.S.-China trade deal also spurred demand for CNY, with key meetings scheduled to be held this week.  Expect the CNY to be part of the discussion given that the central bank governor is expected to attend.  Expect more sideways trading until more news is known about the trade negotiations.  AUD The AUD was one of the more volatile currencies this past week as positive economic data was offset by higher interest rates spurring concerns over a slowing housing market.  Short AUD was used as a proxy for trade war risk so the AUD has benefited from renewed trade deal optimism.  Given this, the realization of a trade deal remains elusive and economic momentum is slowing.  Expect sideways trading with a bias to go lower.   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? 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