Key Events And FX Week Ahead: Central Banks Send Markets Into A Coma, Someone Say Something New Please!
European politics returns with a bang this week, when not only will attention be focused on Austria to see if the right wing Freedom Party joins the People’s Party in a historic governing coalition, in an embarrassing blow to Europe’s establishment, but also whether Catalan President Puidgemont will (again) fomally – and this time clearly – announce whether he has declared independence as Spain’s PM Rajoy demanded last week. Elsewhere, EU leaders meet on Thursday to discuss the progress of the Brexit talks and whether transition and trade negotiations can begin. The official declaration seems highly unlikely to declare that ‘sufficient’ progress has been made, but there are some signs that EU leaders will agree to at least internal discussions on the terms required to agree a transition arrangement. Traders and European leaders will also have an eye on the Czech election (Friday and 21 October), where with signs that the enthusiasm for Western Europe is waning in some of the post-Soviet states, Russophile Andrej Babïs is expected to form the next government, putting more grit into the anti-EU machine.
In Asia, eyes will be on Japan’s snap election next Sunday, where according to a Mainichi report, the eRuling Liberal Democratic Party could win between 281 to 303 seats vs. 284 it holds now according to an Oct. 13-15 poll. LDP coalition partner Komeito could win 30-33 seats vs. 35 seats currently held. LDP-Komeito coalition set to surpass 2/3 lower house majority of 310 seats. Yuriko Koike’s Party of Hope may win between 42 to 54 seats; Constitutional Democratic Party of Japan 45-49 seats.
Economic data includes revised European inflation data (Tuesday), the ZEW survey (Tuesday) which is expected to show an increase, and German PPI (Friday) which consensus predicts will hit 2.9% YoY. In the US, we get industrial production and capacity utilization (Tuesday) which are expected to show a pick-up in September, but housing data: permits (Wednesday), starts (Wednesday) and sales (Friday) may show a hurricane-related decrease.
The 19th Chinese Communist Party Congress is the Asian set piece event of the week on Wednesday (see our preview here), and it builds to the appointment of the Central Committee and the Politburo Standing Committee on 24 October. The vast majority of commentators expect further consolidation of control by President Xi, and all the important decisions seem likely to have been made already. However, the names that are selected will give an insight to the direction of Chinese economic and foreign policy over the next five years. Consensus is that social financing, money supply data (early in the week) and GDP (Thursday) will show continuing strength in the economy (accompanied by the usual fretting as to whether such a high pace of credit growth can be continued indefinitely).
Following this week’s taster, earnings season gets into full swing next week. After some banks struggled despite earnings being in line with or even exceeding expectations, attention will turn to companies meeting (or missing) targets in the week ahead.
A full breakdown of the week’s events in the table below, courtesy of ING:
With the key events out of the way, here are the main catalyst FX traders will be focusing on, courtesy of Shant Movsesian and Rajan Dhall MSTA of fxdailyterminal.com.
FX Week Ahead – Central banks speakers send markets into a coma . . . someone say something new please!
The past week has seen the speaker schedule littered with the familiar names from the Fed and the ECB spouting the same concerns as they do week in, week out; inflation, wage growth, gradual expansion, policy needs to stay accommodative etc etc. Much, if not all of the rhetoric is ingrained in the market and now to the point where we really to do need to see some evidence (one way or the other) on which way the economic momentum is building up in order to get some differentiation among the major currencies – interest rate spreads aren’t moving.
After Friday’s CPI data out of the US, we saw the USD duly taking a hit – all on the miss on expectations, which saw the core unchanged at 1.7%. The headline rate rose through 2.0% on oil price and no doubt the squeeze on agricultural products affected by the extreme weather conditions, and was explained away to see the greenback down on the week. Given the corrective nature of the USD gains seen of late, there will be plenty of sellers out there waiting for the opportunity to get in on the longer term trend of weakness, but looking across the board, we can only see this justified to any degree against the JPY.
If we look at the relative levels in USD/JPY compared to long end rates, 110.00-114.00 looks about right, but if one believes the benchmark 10yr Note tests back to 2.50%, then we can naturally expect a move to the upper end of the range, safe in the knowledge that major risk events (North Korea, US debt ceiling, etc) all have temporary negative effects on unrelenting risk appetite, with US equities in particular pushing up to ever new highs. Beyond 114.00 will take a significant amount of policy reform from president Trump’s administration, and with market positioning heavily against the JPY, 115.00+ will be a mountain to climb at best.
Factor in the gradual improvement in the Japanese economy, and I maintain that it may soon be time to look upon the JPY on its own merits rather than just a safe haven (a safe haven for Japanese investors only). Data here next week offers up industrial production and trade data in the early half of the week – Japanese stocks look good value in a sea of ballooning valuations.
There is very little out of the US to get excited about, with capacity utilisation and production numbers here also, but which have tended to have little impact on the USD as the market obsesses over inflation. Wage growth I can understand, but last month’s data was hampered by Hurricane season so we have to wait on that one.
More Fed speakers on the schedule, but literally, how much more can they say that we don’t already realise for ourselves? Expect more backtracking along the way; that seems par for the course, with Atlanta’s Bostic now umming and arring over whether Dec is a done deal in comments on Friday – the week before he seemed in line with adding another 25bps. Yellen, George and Rosengren are all happy to commit to another hike this year, but Evans is sitting on the fence again and Kaplan is only whisker away from joining Kashkari in a somewhat discredited uber dove camp.
However, it is at the BoE where the credibility stakes are really running high, and there is much at risk ahead with inflation, employment and retail sales stats all down on the slate for consideration. That said, the MPC have pretty much nailed on a move in Nov, though they continue to draw the ire from a number of quarters – the British Chamber of Commerce the latest to question their change in stance. Among the comments made by Gov Carney last week, one caught my attention; that of policy change not being automatic. My mind swiftly harked back to the Aug meeting when ‘the bank’ near immediately cut 25bps to stem the negative tide from the Brexit vote and there were plenty of us who saw this as unnecessary and quite frankly pointless, given the magnitude of consequences that we (the UK) now potentially face in severing membership with the union.
Brexit talks are clearly not progressing – the notion of soft or hard Brexit has always put wry smile on my face, as there is only hard Brexit to look to no matter how the UK approach the negotiations. If Theresa May and parliament roll over and pay the settlement asked of them in order to progress to the next round of talks on trade, then we can use the word soft in this instance, but otherwise, the EU are not going to give up much ground. Reports that a 2yr transitional deal is already being discussed has given some hope to GBP bulls, but to think this won’t come at a significant cost is blind optimism over reality.
Even so, there is potential for a Cable push higher this week, but we would not expect this to extend very far. 1.3500 would be impressive, but so will the selling interest waiting up a these levels. We saw how short lived the moves were above 1.3600, so I cannot see past a very hard fought up-turn under the circumstances and this will come from the algo driven moves on soundbites and off-the-cuff comments.
EUR/GBP is a little more difficult to gauge given politics has reared its ugly head with Spain and Catalonia drawing up battle-lines. As if the hung parliament in Germany wasn’t enough to prompt some caution in the positive longer term outlook on Europe, this latest development brings the unity factor back into question – indeed, will it ever go away?
This does not seem to stop the demand for EUR/USD however, but that was in and around 1.1700. Nearing 1.1900, the price action has not been so confident and with good reason. Net (EUR) longs are high, and have increased again according to the snapshot CFTC data, but were it not for the miss on US data on Friday, the resilience to the downside would have been seriously tested. We feel it still will, and when the market is finally underwhelmed by the level of QE tapering due to be announced in a few week’s time, the 1.1660 level will likely come under pressure again as rate differnentials eat into longs.
ECB speakers aplenty also, but data wise, CPI on Tuesday is the focal point here. No one is doubting the economic expansion under way – but from a very low base it has to be said, but the pace of EUR gains this year has been meteoric, and one which has not followed core yields – 10yr Bunds still fluctuating inside 40-45bps. A large element of safe haven demand has to be factored in here, but if this is the case, then we also have to start considering when Germany will argue more aggressively to firmer policy tightening to rein in on national inflation. One policy does not fit all – many said it before and will say it again. The EUR does not feel like such a one way ticket now!
Interest in the AUD, has been pretty tame of late, lagging a little in the early part of last week, but coming back with a little more force as a result of the sag in the USD. Domestically, the RBA minutes are expected to reflect the cautious rhetoric of Gov Lowe, but employment has been one of their concerns, and we get the Sep data out on Wednesday. 0.7730 was a level we were watching and which held well, but on the upside, traders will fade this through 0.7900 unless we get some clear evidence that wages will push through on spending and inflation thereon.
China’s GDP stats couls also impact to a degree this, but the much lower than expected trade surplus did not seem to unnerve the market given demand for raw materials out of Australia – fact not opinion.
In NZ, we are supposed to find out which way the NZ First party will go to form government on Monday. The end of (last) week NZD move higher was somewhat presumptuous, with plenty of reasons to believe that Labour could win out given policy overlap between the 2 parties. The start of the week also releases Q3 inflation, where the year on year rate is expected to rise from 1.7% to 1.8%. A combination of the above results could see us testing back towards and through 0.7050, but higher up, we will struggle much past 0.7300-25 while the USD decides what to do. AUD/NZD is right in the middle of the 1.0825-1.1150 range which has held since late Aug, and should maintain these limits for the time being despite the near term risks mentioned above.
For Canada, next Friday’s inflation report is one to watch, though on Monday we also get the BoC business outlook survey. Since the strong Q1 and Q2 GDP results and rate hikes in response, we have seen some mixed jobs data, while growth over Jul was flat. The central bank have quietly signalled their monitoring of mid-long end rates, just as they have on the currency, and it has been pretty orderly since then, with a propensity to err on the upside given the domestic stats so far. The market here is still net long CAD, but this may start to neutralise a little should the prospects for a return to 1.2000 fade. NAFTA negotiations under way are not proving harmful, nor we feel with they, with Trump and Trudeau sharing constructive and amiable talks in the meantime. Oil prices are holding up well to offer healthier margins for most oil producers – Canada comfortable with WTI at $40-60 we are told.
All pretty quiet in the Scandies this week with only Norwegian trade and Swedish employment to look to All we need to do here is monitor a NOK/SEK rate stuck in a range and back on a 1.0200 handle since. When that breaks out, we will start looking into these pairs with a little more detail, but little to differentiate here at this point.