Week Ahead | 07/01/2019
January 7th to 11th | The markets are slowly picking up.
As the Christmas holidays drew to an end the markets were shook by the release of the US employment report and Fed Chairman Powell’s comments on Friday. In the coming week Powell’s comments are expected to continue weigh on the USD. Also we expect the US-Sino negotiations and the release of a number of financial releases, along with the release of the FOMC’s meeting minutes to affect the USD’s direction. ECB will also be releasing the minutes of its last meeting and if coupled with a number of financial releases could affect the common currency’s direction. Also please note that the BoC will be the first central bank to release its interest rate decision of the year. The UK braces for further developments in the Brexit negotiations and release of the GDP rates near the end of the week, could provide guidance for the pound. For all of that and then some, let’s have a closer look in the following report.
USD – US-Sino negotiations, FOMC’s meeting minutes and financial releases to set the tone for the greenback.
In the US, after the release of a robust NFP figure and the comments made by Powell on Friday, markets seem to be turning their attention to the US-Sino negotiations beginning this week. After the ceasefire agreed by US president Trump and his Chinese counterpart XI, in the last G20 meeting, the negotiations could prove of substance as the effects of the trade conflict seems to have started taking their toll on the two economies. Hence, the negotiating parts could be more leveraged to reach an agreement by the end of March. Should there be no agreement by then, the US may raise more tariffs on Chinese imports, with further escalation being in the cards. Also the release of the FOMC’s last meeting minutes on Wednesday, could provide volatility for USD pairs, as the Feds intentions have been a main issue concerning the markets, especially over the past week. Should the release, show that the bank may be more data dependent in the future, we could see the USD weakening. Also the release of the US CPI rates for December, at the end of the week could provide volatility for USD pairs, as the headline CPI rate is forecasted to slowdown (Forecast: +1.9% yoy vs. Prior: +2.2% yoy), while the core rate is forecasted to remain unchanged at +2.2% yoy. Should the headline rate slowdown as forecasted we could see the USD weakening again as the rate’s forecasted deceleration could strengthen arguments against the Fed’s current rate hike path for 2019.
CAD- BoC to start the 2019 interest rate decisions .
BoC is to release its first interest rate decision for 2019 and is expected to remain on old at +1.75%. Currently CAD OIS imply a probability for the bank to remain on hold of 88.75%. Should the bank remain on hold as expected, market focus could turn to the accompanying statement and following press conference of BoC governor Stephan Poloz. The recent deceleration of the inflation rate (both headline and core are currently below the bank’s median target) and with persistently low oil prices could provide enough argumentation for the bank to maintain a more dovish tone, which in turn could weaken the CAD, despite its recent strengthening against the USD. Should on the other hand the bank try to maintain a free hand regarding its future rate hike path, we could see it maintaining a more neutral tone, which in turn could provide some support for the Loonie. We expect volatility for CAD pairs to extent until after the closure of Stephan Poloz’s press conference.
GBP – Brexit developments and GDP data near the end of the week to provide direction for the GBP
Across the Atlantic, the UK could experience further political instability due to Brexit. The rescheduled parliament vote date is nearing and debate is to start in the UK parliament this week. UK’s PM Theresa May over the weekend did not exclude the possibility of a new referendum nor of multiple parliamentary vote. We see the case for Brexit to start reeling in again, getting more intense and the political uncertainty continuing to weigh on the pound. On the financial releases front, near the end of the week, we get the UK GDP growth measures for November. The month on month rate is forecasted to remain at +0.1% mom, while the year on year rate is forecasted to decelerate to +1.3% yoy, if compared to prior reading of +1.5% yoy. Should the forecasts be realized we could see the GBP slipping as the forecasted reading are rather lukewarm if not weak. On the bright side, the manufacturing output growth rate for November, which is to be released at the same time is expected to accelerate and could provide some support for the pound.
EUR- Possible gains could remain in check by a bearish sentiment.
Across the Channel, the common currency could be influenced by the release of the ECB’s release of its Account of Monetary Policy Meeting on Thursday. The ECB’s last decision, to remain on hold once again, was accompanied by worries about the Eurozone’s growth prospects, with the ECB accepting that a slowdown in 2019 could be in the cards. Should the contents of the minutes to be released confirm the bearish mood, we could see the common currency weakening. On the other hand, Eurozone’s unemployment rate for November, is expected to remain unchanged at 8.1%, Germany’s trade balance also for November, is expected to be a slightly widened surplus as its industrial output growth rate is expected to accelerate for November. Overall, the uncertainty of Eurozone’s macroeconomic outlook could keep any gains in check though.
AUD – US-Sino negotiations with Chinese and Australian data to affect the Aussie.
As the AUD is considered a close proxy for the Chinese economy, we could see the developments surrounding the US-Sino negotiations to affect fundamentally the Aussie’s direction. Should there be a positive outcome or some further positive developments, we could see the AUD getting some support and continue its recent upward direction. On the other hand should the negotiations start sending out negative signals for the outcome we expect the Aussie to slip as risks for the Chinese economy are to rise even further. Also the release of Chinese inflation measures on Thursday, such as the CPI and the PPI (which are both currently forecasted to decelerate), could cause the AUD to slip, as they would indirectly confirm a possible slowdown of the Chinese economy. On the other hand the domestic market seems to remain rather stable as the Australian retail sales growth rate for November, is expected to remain unchanged at +0.3% mom, on Friday and could provide some comfort for the Aussie.