With global trade issues dominating global markets, it's time for some of the major parties to deliver on threats and promises. With the US threatening China with more tariffs, and China with expulsion from NAFTA2.0 there are a lot of headlines that could drive markets this week when these issues get resolved. Add these issues to the resumption of US/European trade discussions and markets are on a knife edge.
The focus yet again swings around to trade this week as the US and China rhetoric continues to dominate global currency markets. The continued trade story is keeping the US dollar flying high at the moment, with few signs that this will change any time soon. Add this to the positive domestic data out of the US that continues to show the economy in a good position, and it points to an ongoing positive theme for the greenback.
The domestic data this week should also have a similar theme, which all points to a 25 basis point move in interest rates at the next FOMC meeting by the Fed on September 26. This week’s headline data will be on CPI inflation on Wednesday and then the retails sales readings on Friday. The market still expects two more rate hikes in 2018 and more positive domestic data will add pressure on the Fed to deliver.
The highlight for the Eurozone this week is undoubtedly the ECB policy setting meeting. Not much is expected from the meeting in terms of policy changes or updates, however we should get confirmation that the asset purchase plan is being tapered back from EUR30BN to EUR15BN as of next month. There is also no changed expected in the ECB’s forward guidance on rates and inflationary pressures, however it will be interesting to gauge just what sort of impact the ongoing trade issues are having on the economy.
As well as the rate decision those with Euro holdings should look out for the unemployment numbers due on Tuesday as well as Friday’s trade balance reading, which takes on added meaning amidst the ongoing trade deadlock with the US. With talks resuming this week between the US and EU, how long will President Trump keep the EU sweating over the proposed taxing of European cars.
Politics is yet again the big talking point Sterling this week as Brexit headlines have dominated the currency. Last week’s rhetoric from the EU’s chief negotiator Michel Barnier has led to some aggressive upside for the currency as finally we have a little more clarity on some of the bigger issues. Barnier’s comments last week also hinted towards the fact that the EU were potentially softening to some of the UK’s requirements.
It’s been a long time since we have seen this much positivity running through the UK currency, and with the better than expected UK GDP data on Monday that could be a theme for the week. As the week moves on we look towards unemployment data and of course the BoE rate decision. Mark Carney has already told us that we shouldn’t expect to see much from the Bank of England this week, but Brexit will be a key term we must look out for in any statement.
Despite the fact the US and Mexico have reached a bilateral trade agreement the risk of Nafta 2.0 seeing a breakup of the three country block is very real as the US and Canada remain at loggerheads. There remains key issues that Trudeau and Trump remain poles apart on, and with Donald Trump threatening to exclude Canada completely it’s no surprise the last week has seen the Loonie under pressure.
We’ve also seen the positive data dry up a little with the Canadian jobs report following suit with the previous weeks GDP reading to slightly disappoint. It seems there has been somewhat of a turnaround in fortunes for CAD, which seemed like the darling of the FX world for many the previous weeks. It may now be that the Bank of Canada must rethink the overly hawkish rhetoric and revise some rate setting timelines if the uncertainty continues.
It’s hard to envisage an end to the Aussies aggressive downside at the moment, as external forces continue to drive the pair. Trade discussions between China and the US remain one of the biggest drivers here as the reliance on US dollar moves means that the greenback’s strength is doing a lot of damage. The issue here is that there is no sign that this could be over anytime soon, and the likelihood is more tariffs before any meaningful talks.
Domestically there has been issues as well, with a number of retail banks raising standard variable mortgage rates over the last few weeks. With banks raising rates without an actual move in policy rates, it means some of the work of the central bank is being done. The higher SVR’s therefore mean Aussie rallies on the back of hawkish policy rhetoric are likely to be muted in the near term. The RBA are yet to comment on the subject but with expectations on rate hikes already not on the horizon until well into 2019, this could see these now move to the back end of 2019.
While we wouldn't normally cite New Zealand manufacturing PMI as the headline risk to the kiwi, the release this Thursday may be different. The PMI has been on a sharp slide since April and a further decline could move the reading closer to the neutral 50.0 level and would reinforce the Reserve Bank of New Zealand's dovish sentiment. The central bank has already cited weaker business confidence as a main reason for the dovish tone of late and this week’s data could add to that feeling.
Unfortunately, we cannot discount the trade element from the Kiwi as Trumps continuous threats to China over trade will no doubt have more of an effect this week.
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Too much uncertainly in the world