Week Ahead | 11/02/2019
Weekly outlook: February 11th to 15th | US-Sino negotiations, Brexit and RBNZ’s interest rate decision to define the week.
Entering the new week, two fundamental issues are to catch the market’s focus again as they peak once more with substantial consequences for the financial markets. Brexit is to raise volatility for the pound, as the UK Parliament is to re-discus Brexit and have another vote. On the other side of the globe, US negotiators are to visit China to restart the US-Sino trade negotiations and the US negotiating team is expected to push on the intellectual property issue. A bit further to the south Kiwi traders will be awaiting RBNZ’s interest rate decision for further clues on NZD’s direction. On the financial releases front, releases of GDP growth rates as well as inflation rates are expected to gather substantial attention.
USD – US-Sino negotiations and inflation data the main points of focus.
The week begins with the US-Sino negotiations restarting, though this time in Beijing. Chinese Vice Premier Liu He will be joining U.S. Trade Representative Robert Lighthizer and Treasury Secretary Steven Mnuchin in a rather high-level trade talks between the US and China this week. The U.S. negotiating team team will be arriving in China on Monday and the two sides will discuss issues of common concern as a continuance of trade negotiations which took place in Washington last month. The new round of negotiations is expected to take place on the Feb. 14-15 and the US team could be placing additional pressure, regarding the intellectual property issue. A darker shadow has been cast on the this round of negotiations, as the US President had stated past week that it is unlikely that he will be meeting with Chinese President Xi, before the US deadline of the 1st of March. Should the two sides not find a solution by then, the US plans to increase tarriffs (from 10% to 25%) on some 200 $ Billion of Chinese imports . Should the negotiations fail to produce substantial results, we could see USD’s role as a safe haven strengthening. On the financial releases front, the US CPI rates for January are due out on Wednesday. The headline rate is expected to slowdown and reach +1.6% yoy, if compared to prior reading of +1.9% yoy, while the core rate is also expected to slowdown and reach +2.1% yoy, if compared to December’s reading of +2.2% yoy. Should the actual rates meet their forecasts, we could see the USD weakening as it would be another indication supporting the recent dovish U turn of the Fed.
GBP- Brexit, GDP and inflation rates to be main drivers for the pound.
The UK parliament is planned to have another vote on Brexit. The sitting albeit being heavily disputed if it would be postponed or not, seems to be getting a green light. After Theresa May returning from Brussels empty handed, it’s difficult to foresee future developments on the issue as the impasse lingers on and the ball remains in UK’s court. Despite the Labour party throwing a life raft to Theresa May, we do not expect her to take up on the offer, for the issue to move to the next level. We could see UK’s PM playing for time and try to get more breathing time, risking a hard Brexit. Should she fail to get more room to move in, we could see the UK Parliament taking over the procedure or even more extreme scenarios. Whatever the case may be, volatility for the pound could rise and ongoing uncertainty about Brexit could continue to pressure the pound. On the other hand, should there be positive developments on the issue, we could see the pound rising substantially. But it’s not only politics from the UK this week. Pound traders are expected to be holding their breath at the release of UK’s GDP growth rate for Q4. The rate is forecasted to tick down, reaching +1.4% yoy, if compared to prior reading of +1.5% yoy. Should the actual rate slow-down as forecasted, we could see the pound weakening. Also on Wednesday the pound could be in for another hit as UK’s inflation rates are due out for January. The headline rate is expected to slow-down reaching +2.0% yoy, if compared to prior reading of +2.1% yoy, hitting at BoE’s inflation rate target. At the same time, the core rate is expected to remain unchanged at +1.9% yoy. Should the actual rates meet their respective forecasts, we could see the pound weakening as the rate’s deceleration, would indirectly strengthen the pessimistic view of the BoE. Finally there could be some support for the pound near the end of the week, as UK’s retail sales growth rate for January is to be released. The rate is forecasted to accelerate and reach +0.1% mom, if compared to December’s disappointing -0.9% mom. Should the actual rate show the forecasted acceleration, we could the pound getting some support as the rate gets at least out of the negatives, showing some growth.
EUR – Growth to be the epicenter for the common currency.
After the European commision sharply cut its forecasts for Eurozone’s economic growth this year, on Thursday last week, growth is expected to be in the epicenter for EUR traders this week. The issue is being further enhanced this week, as the prelimenary GDP growth rates for Q4 of Eurozone’s largest economy (Germany) and Eurozone as a whole are to be released on Thursday. The German GDP growth rate is expected to slowdown and reach +0.9% yoy, if compared to prior reading of +1.1% yoy, while Eurozone’s GDP growth rate is forecasted remain unchanged at +1.2% yoy (compared to January’s release for Q4). We could see the common currency weakening, should the rates meet their respective forecasts as such results could increase worries about Eurozone’s growth perspectives as the block’s largest economies are to be held back by increasing global trade tensions and some uncertainty domestically. Please be advised that concerning the particular release, we maintain some reservations for negative surpises, which could strenghen the bearishness of the Euro. Also it should be noted that the Eurogroup will be meeting this week and we could see some frictions there, especially as Italy seems to be in a tight squeze, European Parliament elections are approaching and there seems to be some social unrest (demonstrations in Italy, yellow vests in France etc.) in the area. Also it should be noted that on Wednesday, Eurozone’s industrial output growth rate for December is due out. The rate is expected to remain in the negatives, yet at an elevated position reaching -0.2% mom, if compared to prior reading of -1.7% mom. Should the actual rate accelerate as forecasted we could see the common currency getting some support, yet as the rate is forecasted to remain within the negative territory we could see the market’s reaction being rather muted.
AUD, NZD – RBNZs’ interest rate decision and Chinese data to define direction.
Chinese data are to provide clues for further direction for the Aussie and the Kiwi as their respective economies have a great exposure to the Chinese economy. Starting on Wednesday, China’s trade balance for January is due out. The figure is forecasted to be a substantially narrowed surplus, reaching 35.00B USD, if compared to prior reading 57.06B USD. Worries increase for the AUD and the NZD as the Chinese import growth rate is expected to show an even wider contraction reaching -10.0%yoy, if compared to prior reading of -7.6% yoy. Yet it doesn’t end there, as on Friday, China’s inflation rate for January is due out and is expected to remain unchanged at +1.9% yoy, if compared to prior reading. Should the actual rates and figures meet their respective forecasts or be even weaker, we could see both the AUD and the NZD weakening as the prospects of exporting to China will be taking a serious clip. The Kiwi though has an additional reason to be worried this week as the RBNZ is to release its interest rate decision (Tuesday, 22:00 GMT+2). The bank is widely expected to remain on hold at +1.75% and currently NZD OIS imply a probability for such a scenario of 93.54%. Should the bank remain on hold as expected and given the recent dovish chorus from central banks, we could see the RBNZ joining. Please bear in mind that the RBNZ has a dual mandate (over inflation and unemployment) and the recent rise of the unemployment rate, reaching 4.3% for Q4, along with the deceleration of the employment change growth rate could instigate such a tone. On the other hand the tick up of the inflation rate (reaching +1.9% yoy) for Q4 along with employment cost growth rate remaining stable at +2.0% yoy could provide for some limited optimism. Never the less we see the case for the bank to have some dovish comments and review downwards its forecasts in face of the increasing uncertainty of global trade tensions in its monetary policy statement. We expect that the release of the decision simultaneously as the monetary policy statement to increase risks for dovish elements to prevail and in such a case we could see the Kiwi weakening.