The Week Ahead: Signal vs. Noise

Next week, the ECB will hold not only its first meeting of 2019 but also its first meeting after officially ending its bond purchasing program.
Foreign Exchange: The Week Ahead
Signal vs. Noise
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Andrew Kositkun
Andrew Kositkun
Foreign Exchange Head Trader
Next week, the ECB will hold not only its first meeting of 2019 but also its first meeting after officially ending its bond purchasing program. We should note that, unlike the Fed, the ECB is currently maintaining its reinvestment program.
Recent data out of European economies have been disappointing — see Italy, France and Germany. In fact, economic performance has slowed to the point where some economies may be in a technical recession (two consecutive quarters of negative growth).
While we believe that the ECB will acknowledge the deterioration in data, they are also likely to point out accommodative monetary and financial conditions. Additionally, they are likely to cite a series of one off factors that paint an overly negative economic outlook. To this point, we find one off factors a persuasive argument for Germany’s downturn but see proper recessionary issues in Italy.
Ultimately, we feel that the ECB will find sufficient coverage to frame the current situation as a temporary slowdown and reiterate that the current monetary policy set-up is appropriate as it can be accommodated to the current soft patch.
In the UK, PM May and Brexit return to the spotlight as May is expected to address Parliament and outline her next steps after reengaging with the EU on the 21st. Parliament will be able to add amendments to May’s plans, providing the market with some insight into where MPs would like Brexit to go. Also noteworthy will be MP Boles’ proposal to commit the government to seeking a 9 month Article 50 extension if a deal cannot be passed by early March.
Since the failed Withdrawal Agreement (WA) vote, the GBP has rallied strongly as the markets are pricing in expectations for an extension and a possible second referendum and pricing out a hard Brexit. While we agree an extension should be GBP bullish, it is important to remember that the UK currently lacks a plan of action with majority support, leaving an extension as simply a change of date of a no deal exit, not the elimination of it. As a final point, any choice by Parliament (Norway +, customs union etc.) will be a hope and not a sure thing as the WA needs to be signed before the details of an actual deal are finalized.

MAJOR CENTRAL BANK ACTIVITY THIS WEEK

1/22 Japan Expectations for rates to remain unchanged at -0.10%
1/23 Malaysia Expectations for rates to remain unchanged at 3.25%
1/23 South Korea Expectations for rates to remain unchanged at 1.75%
1/24 Norway Expectations for rates to remain unchanged at 0.75%
1/24 ECB Expectations for rates to remain unchanged at 0.00%

KEY MARKET MOVING ECONOMIC RELEASES

United States and Canada

Some of the U.S. data releases are approximate dates due to the government shutdown

1/22 Existing Home Sales Expectations for a decline from 5.32m to 5.24m
1/22 - 2/1 New Home Sales Expectations for a gain to 58.0 from 57.4
1/22 - 2/1 Factory Orders   Expectations for an increase of 0.3% following a -2.1% print
1/22 - 2/1 Durable Goods Orders Expectations for a gain of 0.8% matching previous gain
1/22 - 2/1 Trade Balance Expectations for another large trade deficit
1/23 Canada Retail Sales Expectations for a decline of 0.7% after a gain of 0.3%

Europe/Eurozone

1/24 EZ Composite PMI Expectations for a gain to 51.4 from 51.1
1/22 German ZEW Survey Expectations for a decline from 45.3 to 43.3
1/25 German IFO Index Expectations for a decline from 101.0 to 100.6
1/22 U.K. Jobs Report Expectations for the UR to remain at 4.1%

Asia/Japan and Australia

1/22 Japan Trade Balance Expectations for a smaller trade deficit
1/24 Tokyo CPI YoY Expectations for CPI to decline from 0.3% to 0.2%
1/23 Aussie Jobs Report Expectations for the UR to remain at 5.1%

FORECASTS

EUR

The EUR has continued to consolidate largely between $1.1300 and $1.1500 since the middle of November. Short term trends alternate between a bullish and bearish bias; most recently, the euro has been weakening. The ECB meeting is this week and given the recent EZ economic weakness, expect ECB President Draghi to lean toward the dovish side once again but this will most likely keep the euro within its recent ranges.

GBP

Hollywood could not have written last week’s script for the GBP. After PM May lost a critical vote by a shockingly large amount, and under different circumstances, would have seen her step down as PM, she marches on and wins a confidence vote the very the next day. The market is short of GBP and for now, the market believes there is a greater likelihood of a softer Brexit as more time will be needed to resolve the economic and political withdrawal. Expect a steady and range bound GBP this week subject to a minimum of political shockwaves.

JPY

While the correlation with the JPY and "risk-on" or "risk-off" strategies is not as strong as earlier in the year, the correlation remains workable. The JPY rose sharply during December as equities and interest rates cratered; as stocks have rebounded along with interest rates, the JPY has weakened. Momentum is a fleeting thing; for now, expect a steady to weaker JPY. 

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. Over the past week, the CNY has consolidated its gains; expect more sideways trading until more news is known about the trade negotiations. 

AUD

The AUD reflects the recent bipolar nature of global equities and interest rates. December was a "risk-off" month and the Aussie weakened sharply reflecting all that pessimism. January has gotten off to a great start with more optimism for equities and interest rates, and the AUD has rebounded. Given how many markets are on autopilot and remain highly synchronized, expect more of the same bipolar reactions. For this week, sideways trading seems to be in order. 
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