The Week Ahead: Conventionally Unconventional

Foreign Exchange: The Week Ahead
Conventionally Unconventional
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Andrew Kositkun
Andrew Kositkun
Foreign Exchange Head Trader
With the risk of sounding like a broken record, global sentiment took another hit last week.  With yields falling around the world and central banks running out of traditional tools to use, countries are increasingly looking at tactics such as negative interest rates, QE and currency intervention as actions to support their economies. 

The irony of this is that these unconventional policies have been so widely used in the US, Japan and Europe, among other countries, that they are picking up a conventional feel.  However, it is important to remember that these tools are unconventional and no one fully understands the entire implication of these policies.  To this end, Australia has been assessing the suitability of measures adopted elsewhere.  

Currently the Australian cash rate is at 1.0% and unconventional policies likely won’t be a legitimate option until the cash rate moves into the .25%-.50% range.  The RBA most likely will want to avoid the cash rate going to .25% as that leaves it only one cut away from zero.  As such, .50% is likely the key level at which the RBA could prefer unconventional rates before further rate cuts.
Should the RBA decide to use unconventional policies, the focus is likely to be on increasing liquidity supply.  This is aligned with what they did in 2007 when the central bank focused on purchasing domestic AUD securities and expanded its balance sheet.  Larger scale asset purchases and negative rates are certainly options, but are likely further down the list of preferred options.   Buying securities outright exposes the RBA to price and liquidity risks and negative rates hurt the banking sector.  As such, the bar should remain high for the RBA to implement these two measures.          



For most of last week, the EUR remained under pressure and near the bottom of its most recent ranges.  Markets continue to anticipate weak EZ economic data combined with expectations of additional monetary stimulus measures from the ECB. An escalation of the trade war between the U.S. and China caused U.S. interest rates to crash Friday sending the euro to its best levels over the past week. Continue to expect further choppy and consolidative markets with the EUR trading sideways this week.


The GBP has recently benefited against both the U.S. dollar and EUR from an apparent thaw in the Brexit negotiations as comments from German Chancellor Merkel indicated a greater willingness to work through some of the more contentious issues. U.K. economic fundamentals remain weak but the market has been caught too short of GBP this week. Expect more sideways trading this week. 


For the past three months, the JPY has been the top performing major currency appreciating by nearly 4%, followed by the Swiss franc.  The continuing safe haven status of this currency combined with 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 differentials. Heightened trade tensions will only continue to add to further JPY appreciation. Expect a steady to stronger JPY this week.


Positive economic readings for manufacturing and inflation supported the loonie and the case for BoC to hold rates in the near term.  Fed comments reaffirming data dependency and further trade concerns due to additional Chinese tariffs on the US resulted in equity and oil selloffs and pushed USD/CAD back above $1.33. Expect USD/CAD to continue to move higher as global growth concerns persist.


Since the CNY broke through the key psychological level of 7.00/$ on August 5th, the CNY has remained vulnerable to further weakness. On Friday, the CNY tested its lowest levels since August 5th  at near 7.13/$ as China hit the U.S. with more tariffs along with the White House's retaliation.  Continue to expect a steady to weaker CNY as both sides remain dug in with no end in sight.


The AUD has been sliding lower throughout the year, but received some support this week off positive labor data and RBA minutes that pushed for a period of stability. Given recent developments in the US-China trade war, global uncertainty continues providing the case for a lower AUD as the RBA will have to resume cuts. Moving into next week, expect AUD to continue to move along current historic lows.


8/28 Israel Expectations for rates to remain unchanged at 0.25%
8/29 South Korea Expectations for rates to remain unchanged at 1.50%


United States and Canada

8/26 US July Durable Goods Orders Expectations for a MoM increase of 1.1%
8/27 US August Consumer Conf. Expectations for a MoM decrease of 5.7 to 130.0
8/29 US 2Q Annualized GDP Expectations for a Q2 reading of 2.0%
8/30 US July Personal Income Expectations for a MoM increase of 0.3%
8/30 US July Personal Spending Expectations for a MoM increase of 0.5%
8/30 US July Chicago PMI Expectations for a MoM increase of 3.6 to 48.0
8/30 Canada June MoM GDP Expectations for a 0.1% increase 


8/26 Germany 2Q GDP Expectations for a QoQ decrease of 0.1%
8/29 Germany August CPI Expectations for a YoY increase of 1.5%

Asia/Japan, and New Zealand 

8/30 China August Manuf. PMI Expectations to remain unchanged at 49.7
8/29 Japan July UR Expectations to remain unchanged at 2.3%
8/29 Tokyo August CPI Expectations for a YoY increase of 0.6%
8/29 Japan July Indust. Prod Expectations for a MoM increase of 0.3%
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