It’s gearing up to be a very busy week that is likely to be dominated by new Fed Chairman Jerome Powell’s first Federal Open Market Committee (FOMC) meeting on Wednesday. However, before that, the G20 finance ministers and central bankers meeting will be held in Argentina. As always, at the G20 meetings, there will be a focus on the divergence between the worlds developed economies, and the monetary policy being adopted by the Central Banks.
The European Central Bank (ECB) President Mario Draghi will be at the meeting, and will likely be focused on fending off questions around when he will start to slow down the amount of stimulus being pumped into the Eurozone economy. At the last meeting and press conference Mr. Draghi changed the language in his statement, and instead of insisting that the ECB was ready to increase the Asset Purchase Program (APP) in both size and length, he instead insisted that the bank was now ready to do “whatever it takes” to ensure financial stability in the Euro area.
Brexit is the big risk event that still dominates any Sterling denominated assets, and with a whole host of headlines hitting the wires on Monday in Europe it was no surprise. Monday morning saw the news that the UK and EU had broadly reached another agreement, this time on a transition deal. The transition deal detailed how both countries will effectively cope without one another and how they plan to separate. As a result, we can expect a frenetic week as not only do we await headline news regarding Brexit, but we will also try and decipher central bank policy news at Thursday’s Monetary Policy Committee meeting.
The EU has issued a new draft Brexit treaty, and within this treaty, both the EU and UK have agreed there must be a “backstop on the Irish border issue”. On Monday, Michele Barnier said that despite much of the treaty being agreed to that Ireland remained an issue, signaling that many of the same issues remain including one of the biggest stumbling blocks for Brexit. This continues to be an issue to those exposed to Sterling as Brexit headlines continue to impact markets and there is little certainty on when news will surface.
The US dollar will be dominated by the Fed this week as we look towards Jerome Powell’s first Federal Open Market Committee (FOMC) policy meeting as Chairman of the Federal Reserve, and his first meeting is expected to produce a rate hike. The probability for a rate hike at Wednesday’s meeting is close to 99% with rates all but confirmed to move to 1.5% from the 1.25%, an increase of 25 basis points.
There is uncertainty as to whether the FOMC meeting will provide much in the way of large moves to the US dollar. With the probability of a rate hike at 99%, the market risk is if no rate hike is announced at all.
The real headline that the US dollar will be waiting for is a hint towards either 3 or 4 possible rate hikes in 2018 during the follow-up statement and news conference. We expect Powell to yet again highlight the solid US growth story, as well as the robust jobs market, as he mentioned in his previously prepared remarks, but only one topic will satisfy the market’s needs.
Elsewhere on the macroeconomic front in the US, the calendar is looking a little light of any real data, especially before Wednesday. Thursday and Friday will see weekly employment data as well as durable goods orders, but apart from that, the markets will be solely focused on Mr. Powell and the Fed’s rate hike, and the indication of three or four rate hike decisions in 2018.
The Canadian dollar has been a clear underperformer over recent weeks, with some huge swings in Loonie denominated currency pairs. This has been impacted by US trade policy and the indecision surrounding President Trump’s steel and aluminum tariffs. There is also the prospect of a less hawkish Bank of Canada (BoC) after hiking rates at last week’s policy decision, but at the same time being cautious ahead of any NAFTA renegotiation.
We saw evidence of both of these in the recent moves that saw USD/CAD move above 1.3000. The governor of the BoC, Poloz, flagged the need for patience when it comes to monetary policy, pushing the probability of a rate hike in Canada out to November at the earliest.
Later this week, risk comes from the economic calendar, with Retail Sales data taking centre stage on Friday and central banker speeches earlier in the week which could create CAD volatility. USD/CAD has been one of the most volatile currency pairs of recent weeks, and with expectations that Canada may have to concede some ground over NAFTA negotiations after being made exempt from the US trade tariffs, this could be in the cards for a little longer.
Trump’s trade policy is also the dominating factor for the Australian Dollar, as global trade wars intensify this week. Commodity based currencies, like the AUD, NZD and CAD will be most at risk from these types of headlines. With these commodity currencies caught in the crossfire, you can never rule out market risk, despite a lack of economic data due out of Australia this week.
AUD/USD will focus on Wednesday’s Fed, but without any surprises here, as is widely expected by the market we could find the risk coming from the Twitter account of the President. We will look towards the Australian Jobs report due out later in the week, with a strong number potentially supporting the AUD. Meeting minutes from the last Reserve Bank of Australia meeting will be released on Tuesday, and again a focus here will be on any clear indication of future policy and economic performance.
It’s again the Central Bank that dominates proceedings in New Zealand after last week’s disappointing Q4 GDP reading. The GDP reading came in at 0.6% vs. the expected 0.8%, so the market will likely look for some projections on growth and inflation on Wednesday. However, with none of this expected the market may only be able to focus on the type of language used in the statement. The probability of a rate hike in New Zealand is all the way down at 1%, with no hike expected in 2018.
With the picture on rates particularly clear for now, the focus will go back to the global trade wars and Trump’s tariffs. These, and any further fallout or news of a global trade war, will be the main risk anchor for the Kiwi this week.
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Soaring US yields trigger the wrecking ball effect as yields become a source of volatility for risk, rather than a source of support