It was a turbulent week for equity markets in the US last week that eventually saw Wall Street find some upside on Friday. As the new week starts there are still some headlines that leave markets undecided of their next direction, which in turn adds yet more uncertainty to the Dollar this week.
The US-China trade conflict is still hanging over our heads as a key risk point for the week, with no signs of a slowdown. It was trade that caused the emerging market contagion in both Turkey and Argentina, so the recovery here is still fragile. Headlines of possible talks last week between Trump and Ji make us believe that we could be close to talks, however the safe money seems to be on the November G20 for the next time the leaders of the two most powerful nations will meet for trade talks.
Domestically Monday sees retail sales and industrial production numbers while the rest of the week focusses on Wednesday’s FOMC meeting minutes. There is a clear pressure from the White House on the Fed to prop up the stock market by holding off on its current rate path, a path that is expected to lead to another hike in December (current probability 77.2%). The likelihood of Jay Powell doing that however are very slim. Market stability was always a key decision point for Janet Yellen, but after a Trump esq speech on the strength of the economy and that Fed policy it seems unlikely a week of downside would affect the Fed’s overall position.
We focus on Italy again for the Euro this week as the Italian government submit their three-year budget plan, however it will be the EU’s response that is likely to cause the biggest fluctuations in the Euro. The expectations are a plan for a 1.7% of GDP deceit, that will cause issues with the EU and likely result in more damaging rhetoric that will cause issues for Italian bond yields as well as the single currency.
With the Italian budget unlikely to give the Euro much to shout about it could be the Brexit Summit that bring opportunity to the upside. The currency has seen some big swings on the back of the Brexit headlines out of the UK, hopes of a deal this week seem pretty slim which would give the Euro some short term upside. Domestically its CPI that’s going to grab the focus on Wednesday as anything away from the 2.1% expected is likely to cause issues for the currency.
Brexit is the focus this week as Wednesday’s EU Brexit Summit looms with no deal in place. Despite no deal being in place the pound has been rampant, and it seems that the withdrawal plan for the UK is close depending on where you look and who you speak to. Many investors will feel that we have been here before, most notably in Salzburg where the Prime Minister expected to come away with an agreement but instead got roundly knocked back.
Getting a deal from the EU is not the end of the story here as any deal must be able to get a majority vote in UK parliament. Any deal will have to walk the tightrope of keeping UK MP’s happy as well as keeping EU leaders happy, a tough job. An even tougher job when you have Arlene Foster, the head of the DUP (the Conservative parties coalition partner) talking down the chances of a deal due to the lack of an Irish border backstop arrangement.
It’s also a big week domestically for the Pound with a host of UK data releases. The big one is the UK unemployment data, and most notably the wage numbers. We could be in line for another strong average earnings readings, which in turn will help the BoE when it comes to fighting off the effects of Brexit. Also out this week will be CPI inflation and UK retail sales, with the later, we focus on just how big the shortfall will be after the big summer numbers.
It will be the domestic calendar that dominates proceedings for the Loonie this week with a data-heavy week. Inflation and retail sales will be the headliners, but we must wait until Friday for both of those. Despite the amount of data it’s expected that many will come in flat or in line with expectations as predicted by the Bank of Canada.
The central bank is still expected to hike rates yet again this month, which is why we must pay such close attention to the numbers. With the USMCA deal now complete it will be solely the macroeconomic picture that drives Governor Poloz’s decision. Like many other commodity dominated currencies, there will be a focus on the WTI oil price. Pol price volatility could be the factor that caps any big moves to the upside for the Canadian Dollar.
It has been pretty ugly of late for the Australian Dollar as a perfect storm of factors have led to some severe downside. However, there were signs of life for the beaten up currency last week, despite very little change in the forces fighting it. We can put the hold up on AUDUSD down to technical levels, however that can also mean that it may well be short-lived. Yet again the trade conflict between the US and China will be the biggest worry for those holding Aussie denominated risk, despite much of the bad news being priced in.
The currency will be at the mercy of the US as any more stock market slumps, or bond yield moves will add to any downside. With the start of earnings season in the US also its yet to be seen whether the company data will help or hinder the stock market uncertainty.
Given that the RBNZ's dovish policy has been a key factor weighing on the New Zealand Dollar, the 3Q CPI report will be an important test of this. The market is still pricing in a small chance that we will se a rate cut in the first quarter of 2019 so any positive CPI surprise could dent any lingering dovish sentiment. Market consensus for the headline CPI print is +0.7% QoQ (versus +0.4% prior). With business confidence also a key concern for policymakers, its doubtful that investors will necessarily look for any hawkish RBNZ headlines on any solid CPI release this week.
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Ongoing rate curve repricing and risk asset reaction perfectly illustrate how worryingly reliant investors have become on easy money policies