After the ECB remained on hold this past week, the baton has now been passed to the Bank of Japan (BoJ), Bank of England (BoE) and Fed this upcoming week.
The BoJ finds itself in a bit of a tricky situation as it doesn’t have the luxury of seeing how the markets react to whatever the Fed will do. Most likely the BoJ will remain on hold and while strengthening its forward guidance indicating it will ease if necessary.
Over in the UK, Boris Johnson, the UK’s new Prime Minister, has promised a swift exit from the EU, even if this means leaving without a deal. While doubts remain as to the credibility of this threat, partly due to Parliament being firmly against it, the BoE has no choice but to account for this possibility. Prior to now, BoE forecasts were preconditioned on a 100% chance of a smooth Brexit. As a result, expect the BoE to continue to shift towards a more dovish stance to accommodate for the divergence between its prior stance and reality.
Finally in the US, the Fed is faced with its own set of complications. Market pricing appears to have made a 25 bps point rate cut a foregone conclusion. The greater challenge for the Fed will be how it justifies this move in light of solid US economic data. Complicating the issue has been the Fed’s jumbled communication leading up to this meeting. My sense is that the Fed will try to position its move as a risk management step given all the global uncertainties and to reposition its policy to increase the credibility of its inflation goal.
Interestingly, the USD has remained resilient in the face of a material shift in the market’s expectations on the Fed rate path. Historically, the USD tends to weaken at the start of an easing cycle but this oversimplifies the considerable variation in USD reaction across different easing cycles. Ultimately, the USD’s performance during an easing cycle has more to do with the global economy rather than the Fed. As a result, it’s reasonable to expect the broad USD to remain resilient as the Fed cuts rates against a backdrop of weak global growth.
The EUR has finally broken through the key 1.1200/USD level that has been supportive for this currency since June. Continued weak EZ economic data combined with the heightened expectations for further ECB monetary stimulus or further rate cuts in September have set the stage for near term EUR weakness. Expect further consolidation ahead of the key FOMC meeting on Wednesday. A 25 bp cut in interest rates is priced in; 50 bps would cause short term U.S. dollar weakness. The near term bias in the market is for a weaker EUR.
Brexit uncertainty will continue to hinder and undermine this currency until such time that new PM Boris Johnson can demonstrate an ability to shift the dynamics with the EC or with Parliament. Perhaps his energy and charisma and a new cabinet can succeed where PM May was unable to but in the short term markets remain skeptical. The GBP is testing its yearly low as U.K. interest rates continue to fall and approach 2016 lows.
U.S. interest rates appear to have finally stabilized once again; with that the JPY too has stopped appreciating. Since the beginning of July the JPY has traded in a narrow range of USD/107.00 to USD/109.00. The FOMC meeting will be an important key for the future path of U.S. interest rates and can expect the JPY to shadow and mirror that path. Higher U.S. interest rates implies a weaker JPY and lower U.S. interest rates imply a stronger JPY.
Up to the beginning of June, the CAD had remained range bound, testing both the upper and lower limits (USD/1.3500 to USD/1.3100) numerous times with the net result of a near unchanged CAD since January. Since June, the CAD has appreciated steadily to test its best levels since October of last year, but has given back some of those gains as U.S. interest rates have finally stabilized and the DXY index is rising again. As the Bank of Canada appears to be standing pat for the time being, the FOMC’s path of future monetary policy will be key for this currency’s near term direction.
After weakening sharply in April and May, the CNY finally stabilized in June and July. After the FOMC meeting on June 19th, the CNY reflected overall U.S. dollar weakness but has returned to a consolidation pattern. The U.S. and China have agreed to restart trade talks but with little progress so far and markets are anticipating a long and difficult road to reconcile differences. Expect more consolidation ahead of the FOMC meeting and then expect the CNY to reflect overall U.S. dollar weakness or strength once again.
The AUD had remained resilient up until July 18th. It seemed the market had gotten past the back to back RBA interest rate cuts in June and July, and was poised for some consolidation or slight appreciation. Markets have once again reversed course as the AUD has fallen for six straight days, along with the NZD which has fallen near 2% in the past week. Near term momentum and direction will largely fall on the reaction to the FOMC results on Wednesday.
MAJOR CENTRAL BANK ACTIVITY THIS WEEK
Expectations for rates to remain unchanged at -0.10%
Expectations for rates to decrease by 25bps to 2.25%
Expectations for rates to remain unchanged at 0.75%
Expectations for rates to remain unchanged at 2.00%
KEY MARKET MOVING ECONOMIC RELEASES
United States and Canada
Expectations for an increase to 51.8 from 49.7
US Non-farm Payroll
Expectations for a decrease to 160k from 224k
Canada GDP for May
Expectations to remain unchanged at 0.3% MoM
EU Q2 GDP
Expectations for YoY growth of 1.0%
EU July CPI
Expectations for YoY increase of 1.0%
EU Manuf. PMI
Expectations to remain unchanged at 46.4
Expectations for a YoY increase of 1.5%
Germany Employment Data
Expectations for an increase of 2.0k from -1.0k prior period; UR rate remains unchanged at 5.0%
Germany Manuf. PMI
Expectations to remain unchanged at 43.1
UK Manuf. PMI
Expectations for a for a decrease to 47.8 from 48.0
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