The Week Ahead: Being Flexible in a Dynamic Environment

Foreign Exchange: The Week Ahead
Being Flexible in a Dynamic Enviorment 
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Andrew Kositkun
Andrew Kositkun
Foreign Exchange Head Trader
When Congress and the White House agreed to temporarily reopen the government after the longest shutdown in history, they did so for 3 weeks.  With time running out, market focus next week should be on whether or not a proper deal could be struck on border security on a longer funding bill.  A consensus is building that neither side has the stomach for another shutdown again, but many details remain unresolved on an agreeable deal between the Democrats and Republicans. 

Speaking broadly, a possible solution is for Congress to pass a bill similar to one it previously passed prior to the shutdown.  Such a bill would likely allocate a few billion dollars for border security and "advanced border fencing" in exchange for full funding through the fiscal year.  The catch to this is the significant chance that President Trump refuses signing the deal. 

Alternatively, there could be a grand compromise deal with wall funding provided in exchange for immigration reform (ex. DACA renewal), however the tight timeline makes successful negotiations difficult, if not unlikely. 

As a final note, it is possible that President Trump declares a national emergency to build the wall, but this move would be controversial with many Republicans against it and Democrats likely to quickly challenge it in court. 

Ultimately, we remain at a crossroads.  A deal that can pass Congress is unlikely to be signed by the president and a deal that the president will sign won't pass Congress.  Clearly something has to give and if history is a guide, a deal, if any, is likely to come at the 11th hour, implying that we are setting up for headline risks this week around the border wall, China-US trade talks and publication of the Section 232 investigation on tariffs on car imports from the EU.     

MAJOR CENTRAL BANK ACTIVITY THIS WEEK

2/12 New Zealand Expectations for rates to remain unchanged at 1.75%
2/13 Sweden Expectations for rates to remain unchanged at -0.25%

KEY MARKET MOVING ECONOMIC RELEASES

United States and Canada

Some of the U.S. data releases are approximate dates due to the government shutdown
 
2/13 CPI Expectations for a gain of 0.1%: YoY falls to 1.5%
2/14 PPI Expectations for a gain of 0.1%; YoY falls to 2.1%
2/14 Retail Sales Expectations for an increase of 0.1% following a 0.2%
2/15 Industrial Production Expectations for a gain of 0.1% after a gain of 0.3%

Europe/Eurozone

2/14 EZ Q4 GDP (update) Expectations for a gain of 0.2%; YoY at 1.2%
2/13 German Q4 GDP Expectations for a gain of 0.1%; YoY at 0.8%
2/11 U.K. Q4 GDP Expectations for another sizeable trade deficit
2/11 U.K. Trade Balance Expectations for the UR to remain at 4.1%
2/11 U.K. Industrial Prod. Expectations for a gain of 0.1% after a -0.4% print
2/13 U.K. CPI Expectations for a decline of 0.7%; YoY drops to 1.9%
2/13 U.K. PPI Expectations for a 0.0% print; YoY drops to 2.2%

Asia/Japan, and New Zealand

2/12 Japan PPI YoY Expectations for a decline from 1.5% to 1.0%
2/13 Japan Q4 GDP QoQ Expectations for a gain of 0.4%

FORECASTS

EUR

Poor economic data continues out of the EU, with Italy entering into a recession.  Moreover, Germany remains soft with factory orders falling more than expected.  Furthermore, the USD has strengthened since the very dovish Fed as disappointing data around the world makes the US a relatively strong performer. Without any signs of the data turning around, expect economic fundamentals to continue to pressure the single currency.  Finally, keep an eye on the Section 232 report and the possibility of US tariffs on EU car imports. 

GBP

A more-dovish-than-expected Bank of England sent the GBP on a bit of a rollercoaster with the GBP down sharply only to subsequently recover and move stronger.  Ultimately, it still remains all about Brexit.  PM May is back in Europe to try and renegotiate her Withdrawal Agreement but not many, if any, concessions are expected.  This leaves a situation where Parliament is likely to re-vote on a deal that is materially similar to the one that failed by a historic margin.  Given this, Labor has outlined criteria it needs to support a deal but it's a balancing act.  Any move from PM May towards Labor will likely cost her support from her party.  With the possibility for a second meaningful vote this week, keep an eye on the margin of the result.  Expect a steady and range bound GBP this week subject to political shock waves.

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. This matters because the upcoming risk calendar remains full with another government shutdown possible, Brexit uncertain, China trade tensions ramping up and the possibility of auto tariffs on the EU moving to the front.   With risks elevated, expect a steady to weaker USDJPY. 

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 1.31 and 1.33 over the past two weeks. Expect more sideways trading this week.

CNY

China returns from its Lunar New Year holiday this week.  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 US-China trade deal also spurred demand for CNY as well as foreign inflows into Chinese bonds.  Looking forward, trade tensions have elevated again and as we head towards the March 1st deadline, expect further headline risks as is in line with President Trump's negotiating style.  While a US delegation is heading to China for more talks, it has also been reported the president could sign an executive order banning the use of Chinese telecom components.  Expect more sideways trading with a bias for a weaker CNY on trade concerns. 

AUD

The AUD reflects the recent bipolar nature of global equities and interest rates. After strengthening off the RBA's statement which held onto its mild tightening bias, the AUD sold off the next day as RBA Governor Lowe moved away from the statement narrative and introduced a new dovish tone as he replaced "the next move in rates is up" with the possibility for a "move up or down." With AUD data disappointing and China's economy continuing to be soft, expect a bias for a weaker AUD. 
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