The Week Ahead: “We’re Caught in a Trap, I Can’t Walk Out”

Over the past five months there has been an ordinate amount of activity, volatility, and directional movement in global equities, interest rates, and commodities.
Foreign Exchange: The Week Ahead
“We’re Caught in a Trap, I Can’t Walk Out”
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Alan Rose
Alan Rose
Foreign Exchange Senior Trader
Over the past five months there has been an ordinate amount of activity, volatility, and directional movement in global equities, interest rates, and commodities. Foreign exchange rates over the same period of time have remained in reactionary mode with short bursts of directional activity lagging behind the other asset classes.  While 2019 has brought renewed optimism regarding global equities, interest rates have not correlated well with equities and foreign exchange rates have basically gone into hibernation.
The world’s most actively traded currency pair (euro-dollar) is on track to post its tightest quarterly range since the inception of the euro 20 years ago unless market dynamics change in March. The euro has traded in a super narrow range of near 3.4- U.S. cents since January 1. Daily volume of this currency pair is near $1.25 trillion, but somehow, the market has reached an equilibrium point between bulls and bears. FX volatility for the major currencies has crashed from its most recent peak in 2016 near 13.0 to be currently at 6.77…the previous near-term low was 5.00 in 2014.
This recent tranquility will not last as history has taught us that just about the time the markets become too complacent is when volatility will again be ignited. There are too many major variables with potential unforeseen outcomes (Brexit, Federal Reserve, Washington politics, etc.) that will once again send markets into a frenzy of activity. However, as we enter a new month and a new week, there appears nothing on the near term horizon to shake this lethargy and apathy.


3/4 Australia Expectations for rates to remain unchanged at 1.50%
3/4 Malaysia Expectations for rates to remain unchanged at 3.25%
3/6 Canada Expectations for rates to remain unchanged at 1.75%
3/6 Poland Expectations for rates to remain unchanged at 1.50%
3/7 ECB Expectations for rates to remain unchanged at 0.00%


United States and Canada 

3/5 New Home Sales Expectations for a decline from 657k to 583k
3/6 ADP Employment Expectations for a gain of 190k following a 213k increase
3/6 Trade Report Expectations for a sharp increase in the trade deficit
3/8 Housing Starts Expectations for a gain to 1170k from 1078k
3/8 Jobs Report Expectations for a gain of 188k; UR falls to 3.9%
3/6 Canada Trade Report Expectations for a slightly smaller trade deficit
3/8 Canada Jobs Report Expectations for an increase of 11.2k; UR drops to 5.7%


3/7 EZ GDP Expectations for final Q$ GDP at 0.2%;YoY at 1.2%
3/7 German Fact. Orders Expectations for a gain of 0.5% following a -1.6% print

Asia/China, Japan and Australia

3/7 Chinese Trade Data Expectations for a smaller trade surplus
3/7 Japanese Q4 GDP Expectations for final GDP at 0.4%; YoY at 1.7%
3/7 Japanese CA/Trade Expectations for a small CA surplus; larger trade deficit
3/5 Aussie GDP Q/Q Expectations for a gain of 0.5%; YoY at 2.7%
3/6 Aussie Trade Data Expectations for a smaller trade surplus



The EUR continues to consolidate largely between $1.1300 and $1.1500 since the middle of November. Short term trends within that range continue to alternate between a bullish and bearish bias but ultimately lead to the status quo. The ECB meeting is this week and given the recent EZ economic weakness, markets will pay close attention to ECB President Draghi’s economic assessments weighing the shorter term weak economic performance against the need to ultimately normalize interest rates.


The market has been building more optimism around a positive Brexit outcome whether by the March 29 deadline or a possible short term extension. The GBP has been the top performing major currency this year. Market shorts have been squeezed out and it appears by the price action that we have reached a new equilibrium; expect further consolidation and sideways trading in the short term.


While the correlation with the JPY and "risk-on" or "risk-off" strategies is not as strong as in past years, the correlation bears monitoring. The JPY rose sharply during December as equities and interest rates cratered and the JPY became a safe haven again; as stocks have rebounded in 2019 along with interest rates, the JPY has weakened. Most recently, U.S. interest rates have been rising again adding to the near term JPY weakness. Momentum is a fleeting thing for this currency; for now, expect a steady to slightly weaker JPY. 


RBC, our mothership, had forecast a range for the CAD for Q1 of 1.3600/$ to 1.3100$...we congratulate them on picking a top and a bottom!!  Since the correction lower in the USD/CAD from 1.3600/$, the CAD has been largely trapped between 1.3100 and 1.3350 over the past month. The Bank of Canada meets this week; markets are expecting no change in interest rates but will pay close attention to economic forecasts and outlooks.


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 it appears the market has priced in enough good news for now; expect more sideways trading until more news is known about the trade negotiations. 


The AUD largely reflects the recent bipolar and volatile nature of global equities, commodities, and interest rates. December was a "risk-off" month and the Aussie weakened sharply reflecting all the economic pessimism and "risk-off" outlook. January got off to a better start with more optimism for equities and interest rates, and the AUD rebounded briefly. While optimism continues around the U.S.-China trade talks, the AUD reflects continued pessimism surrounding a slowing Chinese economy and weaker Chinese imports of Aussie raw materials.   For the short term, the AUD looks vulnerable to further weakness.
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