The Week Ahead: Onto the Next

Onto the Next Share this story: Andrew Kositkun Foreign Exchange Head Trader With the European Parliamentary elections in the rearview mirror, Europe now has to decide how the top jobs at various EU institutions should be divided up.  Of particular interest to the markets will be the next ECB president. Mario Draghi, the current president, has occupied the role for the past 8 years and will step down at the end of October.  During his tenor, Mario Draghi oversaw a central bank that took extraordinary measures, including never before used actions, in an effort to stimulate the European economy.  Policy wise, all of the candidates agree with maintaining negative rates and QE as policy tools.  Should European growth remain weak, there is a possibility that the commitment not to raise interest rates could extend well beyond Draghi’s term.  While there is a long list of candidates, in reality, the choice comes down to the candidates supported by France and the candidates supported by Germany.  Generally speaking, the German-backed candidates are seen as more hawkish than the French-backed ones.  Ultimately, the decision on the ECB role will come down to what happens to the European Commission President role.  Under the current process, the leader of the largest bloc in the European Parliament (likely Germany’s Weber) should be the European Commission President and block the German-backed candidate from the ECB role.     Whoever ends up as Draghi’s successor will be tasked with policy normalization.  However, this task is made difficult by a global landscape characterized by geopolitical tensions, weak economic performance and stubbornly low inflation.  Premature tightening, such as in 2011, would lead to negative economic consequences at a time when the ECB has one of the most limited monetary policy toolboxes in the world.   MAJOR CENTRAL BANK ACTIVITY THIS WEEK 5/29 Canada Expectations for rates to remain unchanged at 1.75% KEY MARKET MOVING ECONOMIC RELEASES United States and Canada 5/30 US Q1 GDP Annualized Expectations for a 3.1% gain 5/30 US Initial Jobless Claims Expectations for 215k claims 5/31 Canadian Q1 GDP MoM Expectations for a 0.3% gain Europe/Eurozone 5/28 EU Consumer Confidence Expectations for a -6.5 print 5/27 German Consumer Confidence Expectations for a 10.4 print 5/31 German CPI MoM Expectations for 0.3% gain 5/30 UK Consumer Confidence Expectations for a -12 print Asia/Japan, and New Zealand 5/30 Japanese Jobless Rate Expectations for a 2.4% print 5/30 Japanese Industrial Production MoM Expectations for a 0.2% gain 5/30 Chinese Manufacturing PMI Expectations for a 49.9 print FORECASTS EUR The euro had a bit of a reprieve this past week as disappointing US data weakened the USD.  Ultimately, the economic picture in the EZ remains challenged as last week’s disappointing PMI data shows. The prospect of protracted trade disputes should continue to weigh on global trade, an area that the EU has high exposure to.  Expect the euro to remain pressured.  GBP With PM May’s resignation official, markets are now looking towards her successor.  While it remains to be seen who will take over for May, the expectations are for a more pro-Brexit leader.  As such, the GBP has sold off on this prospect.  Results from the EU parliamentary elections should inform the future direction for Brexit as it serves as a proxy for public sentiment.  Expect the GBP to remain under pressure, but uncertainty remains high, and be headline driven as a second referendum/new elections may be the only way to break the deadlock.   JPY Risk-off flows into the safe haven yen have made the JPY the G10’s top performing currency since the beginning of the month.  With both the US and China increasingly entrenched in their respective positions, expect resilient safe haven demand.  Domestically, President Trump visits Japan this week to discuss trade, raising headline risks.  Recent rhetoric from the US on undervalued currencies makes it likely that the yen will be discussed and could bias it stronger.  CAD Falling oil prices, due to global growth demand, helped to weaken the CAD last week. This week, the key events will be the BoC meeting and GDP data with the BoC expected to maintain rates.  Expect the CAD to continue to be influenced by overall market risk sentiment.  Bias for range bound to weaker trading.  CNY Market indications are increasingly pointing to an extended period of trade tensions between the US and China with nationalist rhetoric increasing.  As such, the CNY has been one of Asia’s worst performing currencies on the month as China is seen as being hurt more than the US during a trade war.  Dollar strength and further easing from China should further weaken the currency.  Reports have circulated that China isn’t keen to see USDCNY weaken beyond 7, and there appears evidence of support over the past couple of sessions.  However, it remains to be seen how strong this defense will be if Chinese market measures remain stable.  AUD Trade tensions and monetary policy concerns have pushed the AUD lower.  The RBA has indicated that the labor market would be a key factor in its future rate path.  To this end, the most recent employment report showed an increase in the unemployment rate which has fueled speculation that rate cuts could be moved up.  Continued downward pressure is expected, however market positioning could limit the move. 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