The Week Ahead: The Burden Increasingly Falls on You and I

Foreign Exchange: The Week Ahead
The Burden Increasingly Falls on You and I
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Alan Rose
Alan Rose
Foreign Exchange Senior Trader
While global and U.S. growth has slowed over the past 18 months, the U.S. economy has largely been insulated and amazingly resilient to the trade war relative to many of our trading partners as our economy is not as dependent on exports for growth. While many other global economies are overly dependent on exports for their growth, we are increasingly becoming overly dependent on consumer spending.

Historically, consumer spending has made up nearly 70% of our GDP. Despite the U.S. economy slowing over the past year, the consumer remains in good shape with historic lows in unemployment, rising wage gains, and consumer confidence remaining very strong. Despite slowing business spending and investment, the consumer has remained resilient and absorbed a larger share of GDP at nearly 80% this year. Our economy is becoming equally unbalanced in a similar way to economies that were overly dependent on exports for their growth.

At this point in time, the prospects of signing Phase 1 of a trade agreement between the U.S. and China before yearend look less likely. They have become increasingly complicated by Congress’s legislative reaction to the political unrest and violence in Hong Kong and the likelihood of President Trump signing the new legislation into law.

The U.S. is scheduled to impose more tariffs on Chinese exports next month; China most certainly will retaliate. The impositions of even more tariffs and retaliation will cripple the global economy even more and will most certainly negatively impact U.S. economic growth and the consumer in 2020.

The Trump Administration will need to find a way to thread the needle, get a win-win out of this and hope to reboot the economy if they plan on succeeding politically and economically in 2020. If the economy should weaken further, they cannot continually count on the consumer as the backstop for the economy.

MAJOR CENTRAL BANK ACTIVITY THIS WEEK

11/25 Israel Expectations for rates to be cut by 15 bps to 0.10%
11/28 South Korea Expectations for rates to remain unchanged at 1.25%

KEY MARKET MOVING ECONOMIC RELEASES

United States and Canada 

11/26 New Home Sales Expectations for a decline of -0.5% following a -1.2%
11/27 Durable Goods Orders Expectations for a gain of 0.3%; YoY drops to 0.9%
11/27 Pers. Inc. & Spending Expectations for gains of 0.3% respectively
11/29 Canada Sept. GDP Looking for a rebound in YoY growth to 1.5% from 1.3%

Europe/Eurozone 

11/29 German Jobs Report Expectations for a gain in unemployment; UR at 5.0%

Asia/Japan, and New Zealand 

11/29 Chinese PMI Expectations for gains in manufacturing and services
11/28 Japan Jobs Report Expectations for the UR rate to remain at 2.4%
11/28 Tokyo CPI Expectations for an increase from 0.4% to 0.6% YoY
11/28 Japan Industr. Prod. Expectations for a decline of 2.0% after a 1.7% print
11/26 NZ Trade Balance Expectations for a smaller trade deficit

FORECASTS

EUR

November has brought a change in trend for both the EUR and GBP after a strong performance in October centered on improving Brexit expectations as both currencies moved higher in tandem. While the GBP has consolidated near its highs, the EUR and EUR/GBP have both declined in November. The EUR continues to experience brief bullish and bearish cycles only to consolidate again and trade in narrow bands. Expect more of the same this week.

GBP

The GBP had a spectacular October resurgence on the back of a sharp reduction in the likelihood of a hard Brexit and PM Boris Johnson's positive political maneuvering in Parliament. Last week saw the first of a series of debates between PM Johnson and Labor leader Corbyn; the net result still had the Conservatives favored to win a small majority for election day on December 12. Brexit fatigue seems to have settled in for the U.K. populace as it appears they would like to see a conclusion to Brexit through PM Boris Johnson’s plan and move on.

JPY

The JPY continues to be caught in the cross fire between “risk-on” or “risk-off” sentiments. The JPY continues to shadow U.S. interest rate movements very closely; as U.S. interest rates have corrected lower over the past two weeks, the JPY has grudgingly appreciated. Continue to expect more of the same this week.

CAD

The Canadian dollar has followed a similar path to other major currencies transitioning from October to November where strength has been followed by weakness. Where the Bank of Canada had been on the sidelines where others have been cutting interest rates, markets have shifted to a 40% probability of a rate cut in January from nearly zero. That being said, the CAD is nearly unchanged from August 1 despite numerous mini bullish and bearish short term trends up and down. Expect more consolidation next week.

CNY

After appreciating for most of October on the optimism of an imminent breakthrough on the U.S. – China trade talks, the CNY has given back some of those gains in November. This is primarily due to a lack of progress to conclude Phase 1 of the trade talks complicated by continued pro-democracy unrest and violence in HK. Congressional involvement regarding HK has not made the situation easier to navigate. Markets remain cautiously optimistic for a slimmed down version of Phase 1 before the imposition of new U.S. tariffs in the middle of December.

AUD

The Aussie mirrors much of the recent developments of other key major and commodity linked currencies piggybacking the positive developments regarding U.S. – China trade prospects. November has brought a change in direction as the market takes stocks of recent trade developments and a lack of clarity on key issues as we hopefully approach the finish line. The market is pricing in a 21% probability of an RBA rate cut on December 3 and a 51% probability of rate cut on February 4.  Expect a steady to slightly weaker AUD this week.

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