Week Ahead
 | 15/10/2018

October 15st to 19th | With UK, New Zealand, China, Japan and Canada releasing inflation data, along with Brexit and the US-Sino trade wars a bumpy ride could rattle the markets this week.

As a new week begins the Brexit negotiations could be at a crossroad with wider implications, as the two parties failed to strike a deal, ahead of the EU summit on the 18th of October, over the weekend. On the west side of the Atlantic, Trump’s statements for the Fed regarding rate hikes, may have flooded the headlines last week but had little impact on the markets. On the contrary, any further developments in the US-Sino conflict once again, could dominate the market once more. In the European political theatre, the Italian budget drama seems to be continuing and could provoke repercussions for the common currency, but also new worries rise for the common currency as the German government could start destabilizing. For a closer look of all of that, along with this week’s financial releases, go through this week’s outlook.

US Dollar- Coming out of a mini crisis

President Trump filled the headlines, by naming the Fed as “crazy”, “loco” and “too aggressive” regarding rate hikes. The action was caused by a mini sell off in global stock markets and the president was aiming primarily the December rate hike probably. The market’s reaction was little to none, in contrast to the US inflation release which came out lower than expected and eased the pressure on the stock markets which rebounded on Friday. The other financial release which made headlines, was China’s trade balance figure witch came out far wider than expected and in relation to commerce with the US reached the record high level of 34.1 B USD. Despite analysts pointing out that the rise of the trade balance surplus with US may have been produced by mass sales to the US before the implementation of the US tariffs, effectiveness of the tariffs policy may be set into doubt. Given Mike Pompeo’s chilly reception in his recent visit to Beijing and Friday’s findings from the US Treasury department that China isn’t manipulating its currency, the US-Sino trade war could escalate further this week, creating further volatility for the USD. Should one refer to president Trump’s past statements, the next logical step would be for further expansion or some announcements for US intentions of further expansion of the tariffs policy to a wider range of products and should that be the case, it could include the whole spectrum of the imports from China. Last but not least, the fundamentals of the USD for the week could not be complete without the inclusion of the US treasury yields.

In the past week the movement of the yields provided volatility for the USD and more specifically support, as they rose to record high levels. Should the yields be on the rise once again, they could rise beyond last week’s levels and we could see the greenback getting some support. On the financial releases side of the current week, for the USD two releases stand out. The first release would be the retail sales growth rates for September, with the headline rate forecasted to accelerate and thus provide support the USD, while the core retail sales growth rate could be softening the impact on the market as it is forecasted to remain unchanged and could be implying that the acceleration of the headline rate could be due to rising oil prices. The second release could be the Philly Fed Business Index for October. The index is forecasted to drop, reaching 20.0 if compared to previous month’s reading of 22.9 and should the actual reading meet the forecast we could see the USD slipping. Also the release of the FOMC meeting minutes for the Fed’s last meeting in September will catch trader’s eyes. The meeting resulted in a widely expected rate hike and confirmed the bank’s intentions for a further rate hike in 2018 and more gradual rate hikes to come in 2019. Should the hawks be strengthened by the content, we could see some support being provided for the greenback, however at the same time an adverse effect could take place for the stock market, as shown last week.

GBP- Brexit and financial releases sent mixed signals

Once again in the United Kingdom, headlines are expected to be dominated by the Brexit negotiations. Hopes were contained for now, as the Irish border remains unsolved and negotiations currently ended as they were not able to produce a breakthrough. No further negotiations are expected until the EU summit on the 18th of September, however a blame game may be played out this week, making headlines. A possible backstop solution to the Irish border issue may not be acceptable as a permanent solution by a number of politicians in the UK and should Theresa May not resolve the situation, she may prove unable to find the necessary majority in the UK parliament to approve the deal. The issue could overspill to other matters as the Tory party has currently a slim majority, based on North Ireland’s small DUP party, which is understandably very sensitive to the Irish border issue and the same applies to hard line Brexit politicians. It should be noted that analysts point out that the market has started to mistrust Brexit headlines as in the past few weeks they were often conflicting. We do not share the view though, that financial releases will not affect the pounds direction, albeit Brexit remains the main driver of the pound. This week the financial releases affecting directly the pound start on Tuesday as the unemployment data are due out. The unemployment rate is forecasted to remain unchanged at 4.0%, which could be considered as rather low for the UK economy, the average earnings growth rate which is also expected to remain unchanged at +2.6% yoy, while the employment change figure is forecasted to rise and reach 20k if compared to previous reading of 4k. Should the overall results meet their respective forecasts we could see a picture of a rather tight labor market in the UK, which in turn could support the pound. On Wednesday, we get UK’s inflation rates for September. The core CPI rate is expected to tick down to +2.0% yoy, if compared to previous reading of +2.1% yoy and the headline CPI rate is also forecasted to tick down, reaching +2.6% yoy if compared to previous reading of +2.7% yoy. As both readings are set to slowdown, we could see the pound weakening.

EUR- Add German instability to the Italian drama

The Italian budget issue continued to dominate the fundamentals of the EUR last week and one could expect them to linger on for the current week, as Rome seems to be on a collision course with Brussels about fiscal spending and its budget deficit. Volatility around this issue, could start rising as soon as Monday as the European Commission will start reviewing the Italian budget and its much discussed deficit. More political worries were added over the weekend for the common currency, as the state elections in Bavaria on Sunday, point towards a sharp drop of the CSU (sister party and governing partner of Merkel’s party CDU) as well as the SPD (also governing partner of Merkel’s party). We may see a shift in CSU’s positions regarding immigration to the right in the near future, which could be setting it on a collision course with Merkel and should that be the case, we could instability rising for the German government. On the financial releases side, the pessimistic view of German businesses seems to deepen, as on Tuesday, Germany’s ZEW economic sentiment for October is due out and the indicator is forecasted to drop further, reaching -12.4, if compared to previous month’s reading of -10.6 should the actual reading meet the forecast we could see the EUR weakening.

AUD-Australia’s Employment data and RBA’s meeting minutes to influence Aussie’s direction, along with China’s releases

On Tuesday, we get RBA’s minutes of its last meeting. The market may have had a rather muted reaction for RBA’s last interest rate decision as it remained on hold once again, however should there be any hawkish comments in the minutes there could be some support for the AUD and vice versa if dovish comments prevail. On Thursday, we get Australia’s Employment data for September, with the unemployment rate forecasted to remain at low levels for the Australian economy, while the employment change figure is expected to drop to +15.0k, if compared to previous reading of +44.0k. Should the forecasted drop of the employment figure be realized, we could see the AUD weakening albeit the market’s reaction could be somewhat muted, as the overall picture of the market is of a rather tight labor market. In the fundamentals the continuing US-Sino trade war could continue to affect the Aussie’s direction as it is considered a close proxy for the Chinese yuan.

In the Chinese financial releases side, the forecast of China’s headline CPI rate for September (forecast: +2.5% yoy vs. prior: +2.3% yoy), should it be realized, could strengthen the AUD while on flip side, the forecasted slowdown of the Chinese GDP growth rate for Q3 (Forecast: +1.6% qoq vs. +1.8% qoq) could weaken the AUD.

NZD-JPY-CAD Inflation data could point direction

On Tuesday, during the early Asian session, we get New Zealand’s inflation rate for quarter 3 of 2018. The headline rate is forecasted to accelerate reaching +1.7% yoy, if compared to prior reading of +1.5% yoy. Should the actual reading meet the forecast, we could see the Kiwi getting some support, as the acceleration may cause a slight shift in the tone of the RBNZ towards more hawkish. Chinese data could also influence the Kiwi’s direction in the same way as the Aussie, as New Zealand’s economy is heavily exposed to Chinese exports.

On Thursday, during the Asian session, we get Japan’s trade balance figure for September. The figure is forecasted to be a narrowed deficit of -50.0B if compared to previous reading of -438.4B. Should the actual reading meet the forecast we could see the JPY getting some support as the narrowing of the deficit could be the start of good news for the Japanese economy which is heavily export oriented. On Friday, we get Japan’s CPI rates for September. The core CPI rate is forecasted to tick up, reaching +1.0% yoy if compared to prior month’s reading of +0.9% yoy. Should the headline reading also accelerate, we could see the JPY getting further support near the end of the week.

On Friday, during the American session, we get Canada’s inflation data for September. The headline rate is forecasted to tick down and reach +2.7% yoy, if compared to previous reading of +2.8% yoy. Should the BoC core CPI rate also decelerate we could see the CAD weakening. On the other hand some oil fundamentals could influence the Loonie’s direction as the currency is regarded as closely linked to oil prices.