The Week Ahead: Commonality of the Commonwealth

Foreign Exchange: The Week Ahead
Commonality of the Commonwealth
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Andrew Kositkun
Andrew Kositkun
Foreign Exchange Head Trader
This week Australia and the U.K., two countries in the Commonwealth, hold policy meetings and both are expected to leave rates unchanged.  However, this really is where the commonality between the two end. 

In the U.K., the story is all about Brexit, and while I feel a bit sheepish talking about the same topic over and over again, the reality is that Brexit is really all that matters in the near term.    Brexit negotiations have always been a game of brinksmanship and they continue to be so.  After PM May's Withdrawal Agreement failed to pass by the largest margin in modern history, she has been sent back to renegotiate with the EU.  But with the EU refusing to reopen talks, we will most likely find ourselves in the same place when Parliament votes again mid-February.  However, less time left until the March 29 deadline could increase the chances of approval or a request for an extension. 

Given this background of uncertainty and the Fed and ECB taking a dovish turn, expect the Bank of England (BoE) to also strike a dovish near-term tone.  Over the medium to long term, it is possible the BoE raises its forecasts as wage growth has been stronger than expected and that could be hawkish against current market pricing for zero hikes this year. But, everything is conditional on a smooth Brexit.

Over in Australia, the Reserve Bank of Australia's (RBA) meeting next week could set the tone for 2019.  Previously, the RBA has taken a "glass is half full" approach and messaging has hinted that, while on hold for a while, the next move would be up.  Since then, domestic economic data has slowed.  Additionally, China's economy—a key export market for Australia—also remains soft.  Expect the bank to make concessions to acknowledge increased downside risks but only make modest downward adjustments to its outlook.  Of particular interest will be the RBA's take on the housing market as mortgage rates are rising amid a downturn in the housing market. 


2/4 Australia Expectations for rates to remain unchanged at 1.50%
2/5 Thailand Expectations for rates to remain unchanged at 1.75%
2/6 Poland Expectations for rates to remain unchanged at 1.50%
2/6 Brazil Expectations for rates to remain unchanged at 6.50%
2/7 Philippines Expectations for rates to remain unchanged at 4.75%
2/7 India Expectations for rates to remain unchanged at 6.50%
2/7 U.K. Expectations for rates to remain unchanged at 1.75%
2/7 Mexico Expectations for rates to remain unchanged at 8.25%
2/8 Russia Expectations for rates to remain unchanged at 7.75%


United States and Canada

Some of the U.S. data releases are approximate dates due to the impact of the suspended government shutdown
2/4 Factory Orders Expectations for a gain of 0.3% after a 2.1% decline
2/4-2/8 Personal Inc. & Spend. Expectations for gains of 0.5% and 0.3% respectively
2/7-2/8 Q4 GDP Expectations for a gain of 2.6% after a gain of 3.4%
2/6 Trade Balance Expectations for another large trade deficit
2/8 Canada Jobs Report Expectations for a small gain; UR ticks higher to 5.7%


2/5 German Fact. Orders. Expectations for a gain of 0.3% after a decline of 1.0%
2/6 German Indust. Prod. Expectations for a gain of 0.7% after a decline of 1.9%

Asia/Japan, and New Zealand

2/7 Japan Trade & CA Expectations for an improvement in the trade balance 
2/4 Aussie trade balance Expectations for another strong trade surplus
2/6 New Zealand Jobs Expectations for the UR to rise from 3.9% to 4.1%



The EUR continues to consolidate largely between $1.1300 to $1.1500 since the middle of November. Short term trends alternate between a bullish and bearish bias; most recently, the euro has been strengthening on the back of the dovish FOMC meeting from last week but is still trapped within the same recent ranges. Expect more of the same this week, but we remain tilted toward a stronger euro later this year.


Hollywood could not have written a more outrageous script for the GBP over the past month.  After PM May loses a critical vote by a shockingly large amount on January 3,  and then goes on to win a confidence vote the very the next day, the GBP has only been advancing. Short GBP positions have been largely squeezed out on the belief that a softer Brexit is ultimately in the cards. It appears that most of the positive news has been priced in for now as the GBP is finally consolidating.  Expect a steady and range bound GBP this week subject to a minimum of political shockwaves.


While the correlation with the JPY and “risk-on” or “risk-off” strategies is not as strong as earlier in the year, the correlation continues to bear fruit. The JPY rose sharply during December as equities and interest rates cratered; as stocks have rebounded along with interest rates, the JPY has weakened. With equities remaining optimistic and interest rates recovering, expect a steady to weaker JPY ahead.


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 and a bottom all within the month of January!  Where do we go from here? With the Fed turning dovish and appearing to stand pat for the near term on interest rates, there appears room for commodity and emerging market countries' further near term appreciation. There still remains questions regarding the passage of the USMCA trade deal, but expect a steady to slightly stronger CAD in the short term.


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 as continued weak Chinese economic data impacts the markets. Expect more consolidation this week.


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 along with many emerging and commodity-linked currencies. 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 as the market focuses on the RBA monetary policy meeting this week. 
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