Central bank policy was the highlight of this past week. Central bankers in both England and Japan elected to keep their rates steady. With Brexit still unknown and a strengthening yen, it’s reasonable to expect that these two central banks will continue to adopt a dovish stance.
This dovish narrative continued with the Fed signaling that it stood ready to cut rates if needed and the ECB reiterating that its entire toolbox of easing tools was available. In reaction to this, rates around the world have fallen as markets priced in even more cuts than it had priced in at the beginning of the week, which on its own was already fairly aggressive.
Certainly the economic outlook has changed and data has weakened. However, the extent of this softening doesn’t appear to justify the move in rate expectations. Case in point, the Fed’s economic projections didn’t materially change from its previous iteration, yet expectations for Fed cuts have materially increased. Further illustrating this divergence in expectations are the equity and interest rate markets, with either interest rate markets too pessimistic or equity markets too optimistic.
This brings us to the issue of trade as a trade war could skew the outlook towards what the rates markets have priced in. To this end, the focus next week will be on the G20 meeting and particularly on the expected meeting between Presidents Trump and Xi.
Currently, consensus appears to be for a truce and a resumption of talks. While this avoids a worst case scenario, it warrants reminding that uncertainty would remain high and already high tariffs would remain in place. Clearly any deviation from a truce would be a positive (deal) or negative (escalation in tariffs) surprise.
Ultimately the impact the foreign exchange markets is almost as cloudy as the outlook on trade. Given the guidance from the Fed, the monetary policy and global outlook reaction to a trade war or peace outcome offsetting each other.
MAJOR CENTRAL BANK ACTIVITY THIS WEEK
Expectations for rates to remain unchanged at 0.90%
Expectations for rates to remain unchanged at 1.50%
Expectations for rates to remain unchanged at 1.75%
Expectations for rates to remain unchanged at 2.00%
Expectations for rates to remain unchanged at 8.25%
KEY MARKET MOVING ECONOMIC RELEASES
United States and Canada
New Home Sales
Expectations for a gain from 673k to 685k
Expectations for a decline from 134.1 to 131.0
Durable Goods Ords.
Expectations for a decline of 0.2% after a print of -2.1%
Pers. Inc. & Spending
Expectations for a gains of 0.3% and 0.5% respectively
Canada April GDP
Expectations for a gain of 0.2%; YoY rises to 1.6%
Expectations for a slight increase in the YoY to 0.9%
German IFO Business Index.
Expectations for a decline from 97.9 to 97.5; expectations component to fall from 95.3 to 94.6
Asia/Japan, and New Zealand
Japan Jobs Report
Expectations for the UR to remain at 2.4%
Japan Ind. Prod.
Expectations for a small rise from 0.6% to 0.7%
NZ Trade Report
Expectations for a smaller trade surplus
With the Fed apparently shifting gears to a dovish bias, almost all major and emerging market currencies have appreciated over the past week. European currencies, along with gold, have benefited greatly but the EUR has lagged behind the Swiss franc and Norway. With the key meeting between President Trump and President Xi the highlight for this week, expect the euro to trade steady to slightly higher in the near term.
The GBP has benefited this week from the Fed’s shift in posture and the weaker U.S. dollar but lags behind many key currencies. Brexit uncertainty continues to hinder and undermine this currency. Political developments have narrowed the Tory field to two candidates with Boris Johnson the heavy favorite. He too, will face a daunting task of facing a very divided country and Parliament in reaching a conclusion to the Brexit process. Expect the GBP to lag behind the advancement of other currencies and remain susceptible to weakness.
For the past three months, the JPY has been the top performing major currency appreciating by 3.07%...the euro is near unchanged. The combination of a weakening U.S. economy and the collapse of U.S. interest rates is behind the JPY’s outperformance. Continue to expect the JPY to track U.S. – Japanese interest rate developments and differentials in the near term.
RBC, our mothership, had forecast a range for the CAD for Q1 of 1.3600/$ to 1.3100/$ at the end of Q4 2018. Who would have thought that the range for Q1 would also apply to Q2? The CAD continues to largely range trade but has been prone to sharp movements both up and down depending on economic data. Most recently, the CAD has improved on the back of improving Canadian economic data and lower U.S. interest rates. Look for a steady and range bound CAD this week until the G20 meeting.
After weakening sharply in April and May, the CNY finally reached an equilibrium point in June as the market had factored in enough negative news for the time being regarding the potential for more U.S. tariffs on Chinese exports. Most recently, the CNY has been strengthening by piggy backing off of the weaker U.S. dollar. Expect more sideways trading in the early part of the week with a lot hinging on the optics and substance of the meeting between President Trump and President Xi at the G20 this week.
The AUD has mirrored the movements of the CNY over the past few months combined with the negative effects of weakening commodity prices. Following the CNY, the AUD has rebounded this week on the Fed’s pivot and the weakening U.S. dollar. Expect a range bound AUD early in the week and to once again mirror the movement of the CNY and other key commodity prices.
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This report is for general information and education only and was compiled from data and sources believed to be reliable. City National Bank does not warrant that it is accurate or complete. Opinions expressed and estimates or projections given are those of the authors as of the date of the report with no obligation to update or notify of inaccuracy or change. This report is not a recommendation or an offer or solicitation to buy or sell any financial instrument discussed. It is not specific investment advice. Financial instruments discussed may not be suitable for the reader. Readers must make independent investment decisions based on their own investment objectives and financial situations. Prices and financial instruments discussed are subject to change without notice. Instruments denominated in a foreign currency are subject to exchange rate and other risks. City National Bank (and its clients or associated persons) may engage in transactions inconsistent with this report and may buy from or sell to clients or others the financial instruments discussed on a principal basis. Past performance is not an indication of future results. This report may not be reproduced, distributed or further published by any person without the written consent of City National Bank. Please cite source when quoting.
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