The Week Ahead: Over Their Skis

Foreign Exchange: The Week Ahead
Over Their Skis
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Andrew Kositkun
Andrew Kositkun
Foreign Exchange Head Trader
After the US and China shocked the world by escalating trade tensions, the markets made a historically large dovish repricing of central bank expectations.  With many key central banks meeting in September, it seems that the markets were looking at this month to be an inflection point in the step up of monetary policy response to global concerns.  However, after the Bank of Canada (BoC) and the Reserve Bank of Australia (RBA) meetings this past week, the markets could be over their skis with how aggressively they were pricing in central bank action. 

In Canada, the BoC made a point of asserting its independence, pushing back on expectations that the bank would ease in response to Fed and other central banks easing.  Additionally, the BoC highlighted how policy was already accommodative.  Taken together, this should temper expectations that the BoC could take preemptive action; although ultimately, should the Fed cut, expect the BoC to eventually to follow.   
 

In Australia, the RBA doubled down on its “conditional” easing bias.  So while additional easing is expected, the RBA actions illustrate increased willingness to wait and monitor risks before taking further action.  In essence, the markets got ahead of themselves in pricing in RBA action.

This upcoming week brings the ECB, and the markets are expecting the bank to ease policy and possibly restart QE.  Recent comments from hawks on the board have pushed back on expectations for a robust easing package and, without rule changes, the ECB is currently unable to deliver a credible QE program.  As such, while fundamentals still point to a weaker euro, there are risks for market disappointment with ECB action. 

FORECASTS

EUR

The big event for the euro will be the ECB’s meeting next week.  With expectations high for easing actions, there is asymmetrical risks to the ECB disappointing the markets by being less dovish than expected if the bank cuts rates without opening the door to additional easing actions.  Longer term, the expectation is still for a weaker euro, but in the near term, there is risk for a euro bounce off of ECB disappointment.   

GBP

A bill preventing the government from leaving the EU without a deal has passed Parliament, reducing the chances of a no-deal exit at the end of October.  However, unanimous EU approval of this extension is still pending.  Ultimately, even if an extension is granted, no-deal risk has just been delayed and not eliminated.  The key focus will be on the timing of when an election (most likely outcome) will be held.  Expect the GBP to be moved by headlines and polling data on who would win an election.     

JPY

The JPY finished last week as the worst performing G10 currency as higher US yields, an uptick in foreign asset purchases and improved market sentiment reduced JPY demand.  While trade tensions have eased, the underlying fundamentals remain unchanged.  As such, there are reservations around a breakthrough at the upcoming US-China talks.  Expect the JPY to track US – Japanese interest rate differentials as well as US – China trade war rhetoric with a bias for USDJPY lower. 

CAD

A less-dovish-than-expected BoC and positive economic data helped the CAD strengthen this week.  The narrative remains the same with domestic data being positive but global data being concerning especially in light of Canada’s large exposure to trade.  Expectations are for the CAD to be range bound.   

CNY

Scheduling of the next round of US-China talks are a positive, but there are reservations around the meaning of this meeting.  The markets have witnessed rapid changes in sentiment.  With fundamentals and redlines unchanged, it is reasonable to believe a negative swing is likely.  Ultimately, tariffs are now higher than they were in August and should trigger further downgrades to growth, leading to a bias for a weaker yuan.   

AUD

The AUD, like the CAD, benefited from a less-dovish-than-expected central bank decision and improved trade sentiment.  The RBA reaffirmed its conditional easing stance and willingness to wait before further cuts.  Tariffs are higher now than they were last month and a US-China trade deal remains elusive.  As such, global growth should take another hit, keeping the bias for AUD to move lower.

MAJOR CENTRAL BANK ACTIVITY THIS WEEK

9/12 Turkey Expectations for rates to be cut by 275 bps to 17.00%
9/12 ECB Expectations are to cut the deposit rate by 10 bps to -0.50%

KEY MARKET MOVING ECONOMIC RELEASES

United States 

9/11 PPI Expectations for an increase of 0.1%; YoY rises to 1.8%
9/12 CPI Expectations for an increase of 0.1%; YoY stays at 1.8%
9/13 Retail Sales Expectations for a gain of 0.2% following a 0.7% gain
9/13 U of Michigan Index Expectations for a gain from 89.8 to 90.5

Europe/Eurozone 

9/12 EZ Indust. Production Expectations for a decline of 0.1% after a -1.6% print
9/11 German CPI Expectations for a final print of -0.2%; YoY at 1.4%
9/9 U.K. Indust. Product. Expectations for a decline of 0.3% after a -0.1% print
9/10 U.K. Jobs Report Expectations to add 55k jobs following a gain of 115k

Asia/Japan, and New Zealand 

9/9 China CPI YoY Expectations for a slight decline from 2.8% to 2.6%
9/9 China PPI Expectations for a decline to 0.9% YoY
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