The Week Ahead: “It’s Tough to Make Predictions, Especially about the Future.”
As we approach the end of February, we will be updating and revising our foreign exchange forecasts throughout 2019.
“It’s Tough to Make Predictions, Especially about the Future.”
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Alan Rose Foreign Exchange Senior Trader
As we approach the end of February, we will be updating and revising our foreign exchange forecasts throughout 2019. Our title, a quote by Yogi Berra, implies that it is difficult to predict what the future will hold. Almost all economic indicators that we use and other economists from the Federal Reserve to large money center banks are all backwards looking and never able to capture rapid shifts in market sentiment and psychology day to day.
The Federal Reserve has some of the most seasoned and time tested veterans making monetary policy for the country, and time and time again, they fail to see the signs of an economic bubble or recession impacting the economy. Most recent examples of not doing their homework and looking at the proper metrics were the Dot-Com bubble and stock market crash of 2000 to 2002 and the housing crisis that led to the Great Recession of 2008 and 2009.
Under the best of circumstances, predicting economic outcomes is difficult and foreign exchange is an animal unto itself when having to assess the impact of interest rate differentials, commodity prices, trade flows, equities, etc. from a dual country perspective. Overlaid on top of the normal analysis of economic data, market practitioners have to contend with the two-mega events surrounding future global trade (U.S –China trade negotiations) and Brexit. Both events have the ability to send shockwaves across the markets depending on their outcomes that could last weeks and months.
That being said, because it is hard to harness all these elements, we will not shy away from looking into our crystal ball and making the best predictions we can based on available information and palm reading. For those that follow our writings at CNB, we do our best each and every day to keep our clients and colleagues well informed about the current market mentality, outlook and our best predictions about the future.
MAJOR CENTRAL BANK ACTIVITY THIS WEEK
Expectations for rates to remain unchanged at 0.25%
Expectations for rates to remain unchanged at 0.90%
Fed Chair Powell before Congress Tuesday/Wednesday
Expectations for rates to remain unchanged at 1.75%
KEY MARKET MOVING ECONOMIC RELEASES
United States and Canada
Expectations for a slight decline from 1256k to 1250k
Expectations for a gain of 0.9% after a decline of 0.6%
Expectations for a gain of 2.5% after 3.4% in Q3
Expectations for a decline from 56.6 to 56.0
Expectations for a gain of 0.1% after a decline of 0.1%
Canada Q4 GDP
Expectations for a gain of 1% following a gain of 2.0%
German Jobs Report
Expectations for the UR to remain at 5.0%
Asia/China, Japan and New Zealand
Chinese Manuf. PMI
Expectations for an unchanged report at 49.5
Chinese Caixin PMI
Expectations for an improvement from 48.3 to 48.7
Japan Indust. Prod.
Expectations for a decline of 2.5% after a -0.1% print
Japan Jobs Report
Expectations for the UR to remain at 2.4%
Tokyo CPI YoY
Expectations for inflation to remain unchanged at 0.4%
New Zealand Trade
Expectations for a deficit following a surplus
The EUR has continued to consolidate largely between $1.1300 and $1.1500 since the middle of November. Short term trends alternate between a bullish and bearish bias but soon run out of fuel and exhaust themselves only to consolidate again. Most recently, the euro has developed a Teflon coating to both negative economic data and dysfunctional political developments. Expect more range trading this week.
The GBP, like the euro, continues to consolidate and vacillate within a wider range than the euro but with the extra burden of Brexit negotiations tilted toward optimism or pessimism. Most recently, the GBP has been rebounding higher but appears to be stalling out again. Expect more range trading next week.
While the USD correlation with the JPY and “risk-on” or “risk-off” strategies is not as strong as in 2018, the correlation remains worth monitoring. The JPY rose sharply during December as equities and interest rates cratered; as stocks have rebounded in 2019 along with interest rates, the JPY has weakened. Momentum is a fleeting thing; optimism surrounding a successful U.S.-China trade negotiation is causing a risk-on environment reducing the need to be in the safe haven currencies. For the short term, expect a steady to weaker JPY.
RBC, our mothership, had forecast a range for the CAD for Q1 of 1.3600/$ 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 largely trapped between 1.3350 and 1.3100 over the past few weeks as have many other commodity-linked currencies. Expect more sideways trading this week with a slight bias toward more CAD strength.
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 weakening economy liquid and afloat. Continued positive expectations surrounding a successful conclusion to the U.S.-China trade deal have also spurred demand for CNY. Over the past week, the CNY has appreciated reflective of the positive news cycle surrounding the trade talks; expect the CNY to remain steady to stronger in the near term.
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 and February have gotten off to a great start with more optimism for equities and commodity prices, but this has only allowed the AUD to stabilize as concerns about Chinese demand for Aussie exports continues. Expect more consolidation ahead this week.
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