The Week Ahead: March Madness

Foreign Exchange: The Week Ahead
March Madness
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Andrew Kositkun
Andrew Kositkun
Foreign Exchange Head Trader
The Federal Reserve will hold its next policy meeting this week, and it is widely expected to keep rates on hold and reaffirm a narrative of patience across a couple different dimensions.  

Specifically, the Fed is waiting to see how the relatively tighter financial conditions and shocks to confidence have impacted the real economy.  Additionally, the Fed will be keenly interested in how the global growth trajectory evolves and when inflation will show signs of acceleration.  With all three of these variables highly uncertain due to noisy economic data, continued Fed patience appears to be the word of the moment.

The question then is exactly how patient the Fed will be.  In January, the Fed's dovish pivot included the removal of guidance for the timing and direction of its next interest rate move.  However, the Fed will not be able to hide behind this opaqueness as it will be required to submit new forecasts at its March meeting.  The markets are universally expecting the Fed dots to move down, but there remains uncertainty to the extent this will happen.  The most likely scenario is for the Fed to still forecast 1 hike (down from 2) this year and another hike in 2020.  

Of course the complicating factor to 2020 is that it is also a presidential election year.  While on paper this shouldn't matter as the Fed is apolitical and history shows that the Fed is undeterred on its policy path during election years, the current situation in Washington D.C. is anything but business as usual.  With political uncertainty likely to be at an elevated level, it's reasonable to expect that any rate hikes in 2020 will have to clear a higher than normal hurdle. 

MAJOR CENTRAL BANK ACTIVITY THIS WEEK

3/20 Thailand Expectations for rates to remain unchanged at 1.75%
3/20 United States Expectations for rates to remain unchanged at 2.50%
3/20 Brazil Expectations for rates to remain unchanged at 6.50%
3/21 U.K.  Expectations for rates to remain unchanged at 0.75%
3/21 Taiwan Expectations for rates to remain unchanged at 1.375%
3/21 Switzerland Expectations for rates to remain unchanged at -0.75%
3/21 Norway Expectations for rates to rise by 25 bps to 1.00%
3/22 Russia Expectations for rates to remain unchanged at 7.75%

KEY MARKET MOVING ECONOMIC RELEASES

United States and Canada

3/19 Factory Orders Expectations for a gain of 0.3% after a gain of 0.1%
3/22 Market Manuf. PMI Expectations for a gain to 54.0 from 53.0
3/22 Existing Home Sales Expectations for a gain to 54.0 from 53.0
3/22 Canada CPI Expectations for a gain to 54.0 from 53.0

Europe/Eurozone

3/22 EZ Composite PMI Expectations for a gain to 52.0 from 51.9
3/19 German ZEW Survey Expectations for a decline from 15 to 13
3/22 German Manuf. PMI Expectations for a gain from 47.6 to 48.0
3/19 U.K. Jobs Report Expectations for the UR to remain at 4.0%
3/20 U.K. CPI Expectations for a gain of 0.4% after a -0.8% print

Asia/Japan, and New Zealand

3/21 Japan Nat’l. CPI YoY Expectations for a slight gain to 0.3%
3/20 Aussie Jobs Report Expectations for job gains of 15k; UR unchanged at 5.0%
3/20 New Zealand Q4 GDP Expectations for a gain of 0.6% after a gain of 0.3%

FORECASTS

EUR

Last week, the euro found itself stronger, reversing the sharp decline from two weeks prior and bringing the euro to roughly flat over the past month.   Despite this lack of follow through on a dovish ECB, we continue to expect further euro weakness.  The ECB has signaled caution and global growth concerns still remain, both of which should pressure the euro and support the USD.  Additionally, political uncertainty around the European parliamentary elections in May represents another headwind for the euro.  

GBP

After three rounds of Brexit voting last week, the net result was a second failure from PM May to pass her Withdrawal Agreement (WA) and a vote in favor of extending Article 50.  PM May is expected to table her WA a third time this week but an extension is expected regardless of how that vote goes, with a longer one expected (possibly more than a year) should the third vote fail.  While the GBP has rallied, it is difficult to see a sustained rally absent of convincing evidence that May's WA will pass or signs that Brexit won't happen, both of which appear far off.  Until then, expect choppy trading driven by headline risk.  

JPY

The Bank of Japan left its rates unchanged last week as expected.  However, BoJ Governor Kuroda was more upbeat than expected as he expected a rebound in global growth during the second half of the year.  Given this, expectations for BoJ policy normalization this year have faded.  Opposing forces from Japanese investors being net buyers of foreign securities and suppressed global yields should keep the JPY range bound in the near term.  Positive headlines from US-China talks support market sentiment but is countered by the possibility of North Korea resuming its nuclear program. 

CAD

The CAD strengthened this past week, retracing much of its losses from the prior week.  Higher oil prices and positive risk sentiment have helped the CAD.  However, supply bottlenecks in Canada limit the upside benefit from oil prices.  Recent comments from BoC officials reaffirm that the bank isn't in a rush to raise rates anytime soon.  Near term, expect range trading but longer term, NAFTA 2.0 ratification and Canadian political uncertainties remain.  

CNY

The CNY finished last week on a positive on the back of tax cuts to address the domestic economic slowdown and constructive trade developments despite reports that the meeting between Presidents Trump and Xi has been pushed back.  While the Chinese government has been adding fiscal stimulus measures, it bears reminding that the government is against "flood-like" stimulus and much of the positive trade expectations are priced in.  Additionally, the Chinese economy remains fragile and against a backdrop of a declining current account surplus.  

AUD

The AUD reflects the push/pull nature of beneficial terms of trade against a widening interest rate differential with the US.  While the AUD benefits from positive US-China trade news, there remains risk that a trade deal could result in substitution of Australian exports (i.e. LNG) for US exports.  Moreover, building expectations for a RBA rate cut further exacerbates the interest rate differential, although it should be noted that the labor market remains robust.  For this week, sideways trading with a bias for lower seems to be order. 
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