Morning Commentary: Down But Not Out

Foreign Exchange - Morning Commentary

Down But Not Out

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Andrew Kositkun
Andrew Kositkun
Foreign Exchange Head Trader
The markets returned from the weekend in a relatively quiet fashion.  While this week will be a busy one, with a slew of central bank meetings and an OPEC meeting in Baku, today is expect to be a quiet one data-wise. 
With regards to central bank meetings, the Fed will certainly be worth watching.  With core inflation coming in softer than expected, the narrative of a Fed on hold remains intact.  To this end, the DXY is down again today, continuing its slide from last week and bringing the dollar index back down to nearly flat for the year.  However what remains to be seen is how the Fed will update its economic projections in light of its dovish pivot.   
While the dovish pivot from the Fed has been well covered, other central banks around the world have also surprised to the dovish side leading to an interesting dynamic for the Fed.  With other central banks providing accommodation for their economies, it is possible that the Fed could "import" this stimulus and return to gradually brining rates higher much like it did in 2015 and 2016. 
On the other hand, when the Fed does hike, it "exports" tightening to the rest of the world.  If the Fed believes that the economies around the world are too fragile to handle further Fed hikes, it could remain on hold.  Point being, there are many cross currents from central bank actions, making the updated economic projections for this week's Fed meeting the most interesting aspect.
In our view, the dot plot is most likely to signal a move down from two hikes this year to only one with the risk being for zero hikes.  Outside of this, the Fed should stick to the language changes from its January meeting suggesting a neutral bias.  Finally, given the verbiage from the last meeting, keep an eye on the Fed's plans for balance sheet normalization.  The Fed has been strongly hinting that its balance sheet normalization process could end this year and quite possible that it announces its finalized plans this week.       
  • News reports suggest that the Trump-Xi meeting that was previously pushed back to April could be pushed back again to June.  Additionally it has been reported that the White House could leave the threat of tariffs in place even after a compromise is reached with China. 
  • Japan's trade balance swung from a deficit to a surplus in February.  However this positive headline number was overshadowed by the drop in both exports and imports, both of which underscore the weak demand in Asia. 
  • A third attempt to pass PM May's Withdrawal Agreement (WA) is expected this week. For those keeping count and feeling like it's déjà vu all over again, you wouldn't be wrong.   The EU has refused to make any material changes to the agreement, leaving Parliament to vote on the same deal.  If a third attempt is made, the vote is expected to although by a smaller margin than the first two votes as some pro-Brexit MPs fear a long delay could ultimately result in no exit at all. 
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