The Week Ahead: Playing Catch Up

Foreign Exchange: The Week Ahead
Playing Catch Up
Share this story:
Facebook
Twitter
LinkedIn
Email
Andrew Kositkun
Andrew Kositkun
Foreign Exchange Head Trader
This past week, the BoC delivered a 50 bps rate cut outside of its normal meeting schedule.  In addition, the bank will also offer a commercial paper facility as well as an asset purchase program (QE) for the first time in the bank’s history.

Under normal circumstances, such actions would be a surprise to the markets but we aren’t living during ordinary times, resulting in a fairly muted FX reaction.  Ultimately, it appears that the markets were anticipating this catch up move by the BoC to join most of the G10 at the zero lower bound.  Within the G10, the Fed, ECB, BoE, Riksbank, RBA, RBNZ and BoJ are other central banks also running QE programs.
 

Looking specifically at Canada, the country finds itself in a vulnerable position.  Not only is Canada a services led economy, which is currently in lockdown, it also is dependent on the oil sector.  This makes for a concerning combination as oil prices have fallen to the point where major producers have started to shut down operations, hitting both oil production and the labor market.

It is notable that USDCAD is an underperformer in the G10 space this last week despite the market’s risk on narrative.  This underperformance is even starker on an individual basis with the Canadian dollar significantly underperforming the Norwegian krone, another G10 petrocurrency.  As such, it appears that the market’s bearish view on the Canadian economy’s vulnerabilities are being reflected in the price action.  

FORECASTS

EUR

Risk sentiment and the euro both got a boost last week from the Fed’s unlimited QE announcement, fiscal stimulus from the US and signs of coordinated action in the EU.  Given this, Europe remains one of the hardest hit areas by the virus and the number of US cases has just surpassed those of China, meaning the risk backdrop remains fragile.  Quarter end should see decent USD demand.  Additionally, when the US introduced QE in 2008 and expanded it in 2009, the USD initially weakened but ultimately strengthened.  Bias remains for the euro to move lower.
 

GBP

The GBP moved up on the week but the bias still remains bearish.  Covid-19 fears continue to pressure global assets and Europe has been hit hard.  Moreover, rate cuts from the Bank of England have exacerbated the UK’s large current account deficit that is not compatible with its low yielding status.  EU-UK trade talks have been suspended for now and an extension is likely, however the reality remains stark with both sides still far apart and the probability for a hard Brexit outcome not immaterial.

JPY

Market risk sentiment received a positive bump last week, but I still think material headwinds remain.  The US has yet to reach peak infection and clarity around the ultimate economic impact remains elusive.  As such, safe haven demand is expected to remain persistent.  Keep an eye on Japanese investor demand for foreign risk assets, which has been a key factor dislocating USDJPY from levels implied by yield differentials.  With Japanese long-term yields expected to persist below zero, investor outflows should continue and provide a counterweight to safe haven demand.

CAD

The loonie recovered a bit last week on monetary and fiscal stimulus news, but as indicated in past write ups, additional headwinds are still to come.  The BoC delivered a 50 bps emergency cut at the end of last week, bringing its rate down to the zero lower bound.  Looking forward, expect USDCAD to consolidate with a bias for further Canadian Weakness.

CNY

Reports continue to point to a normalization of economic activity in China. However, the virus continues to spread in other parts of Asia, Europe and North America meaning global growth remains in a precarious position.  Near term, expect currency stability as this is what the PBoC aims to achieve.  Longer term, additional fiscal and monetary policy levers and head start on virus control argue for CNY outperformance.

AUD

Like other currencies, the AUD gained ground this week on a bounce in risk sentiment, but it’s still too early to call a change in the overall picture.  The RBA has stepped up with policy action to support the economy, but virus developments remain the overarching driver.  Continue to expect COVID-19 headlines to drive price action as these headlines inform the extent to which global growth and commodity demand will fall.

MAJOR CENTRAL BANK ACTIVITY THIS WEEK

No major central bank meetings

KEY MARKET MOVING ECONOMIC RELEASES

United States and Canada

3/30 US Pending Home Sales MoM Expectations for a -1.8% decline
4/1 US ISM Manufacturing PMI Expectations for a 46.0 print 
4/3 US Nonfarm Jobs Report Expectations for a -81K decline in jobs
3/31 Canadian January GDP MoM Expectations for a 0.2% increase

Europe/Eurozone 

3/31 EZ CPI MoM Expectations for a 0.6% increase
4/1 EZ Manufacturing PMI  Expectations for a 44.6 print
4/1 EZ Unemployment Rate Expectations for a 7.4% print
4/3 EZ Services PMI Expectations for a 28.2 print

Asia/Japan, and New Zealand 

3/30 Chinese Manufacturing and Non-manufacturing PMI Expectations for a 45.0 and 42.0 print, respectively
3/30 Japanese Industrial Production MoM Expectations for a 0.0% print
4/2 Australian Retail Sales Expectations for a 0.4% increase
If we can help you with any Foreign Exchange needs, please email foreignexchange@cnb.com or call (800) 447‑4133.
Want to learn more about international finance, economics, and global events? Sign up for our other Foreign Exchange emails and videos!
Follow City National Bank on social media:
Facebook Twitter LinkedIn Google Plus YouTube
Non-deposit investment products:
Are not FDIC insured,
Are not deposits or other obligations of City National Bank and are not guaranteed by City National Bank, and
Are subject to investment risks, including possible loss of the principal invested.
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.
Unsubscribe from this list  |  Update email preferences
This message has been sent to bank@banking.offers.report. Please do not reply to this email. To ensure the delivery of future emails, please add foreignexchange@emails.cnb.com to your email address book or safe sender list.
Copyright ©2020 City National Bank – All Rights Reserved.
350 South Grand Avenue, 12th Floor, Los Angeles, CA 90071
City National Bank is a subsidiary of Royal Bank of Canada.
TERMS & CONDITIONS  |  PRIVACY STATEMENT
Equal Housing Lender
NMLSR ID# 536994 | City National Bank Member FDIC
                                                           

Comments

Popular posts from this blog

Acquisitions or Alliances: What's Your Growth Strategy?