Week Ahead Currency Outlook For November 18-22 – Upcoming Economic Data Review, Foreign Exchange Rates, Analysis And Forecasts – Exchange Rates UK

At last, a week largely dominated by distinct stories for each currency, rather than just one general theme.

NZD was the best performing currency of the week after the Reserve Bank of New Zealand (RBNZ) held its Official Cash Rate (OCR) steady instead of cutting 25 bps as was widely (but not unanimously) expected. Note how the odds of rates staying unchanged until next June, which was seen as only a 20% probability the day before the meeting, jumped up to 57%, while the odds of two or more cuts – previously about 34% or one-in-three – is now only 10%. As recently as early October, the market thought there was no chance at all of rates remaining at 1% until next June.

It was noticeable that the comments in the RBNZ’s minutes echoed comments made by Fed Chair Powell and other FOMC members during the week. The RBNZ said that “…the reduction in the OCR over the past year was transmitting through the economy and…it would take time to have its full effect.” St. Louis Fed President Bullard, maybe the #2 dove on the FOMC, said that after cutting rates three times this year, “now it makes sense to wait and see how the economy responds during the fourth quarter here and into 2020.” Generally speaking, it takes two to three quarters (or even longer) for a change in policy rates to feed through to the economy, After 75 bps of cuts this year each in the US, Australia and New Zealand, it may be that policy makers are going to pause to see “how the economy responds.” Of course, in this scenario Norway (with 75 bps of hikes this year) and Sweden (+25 bps) are the odd ones out – but I don’t usually cover those economies.

Excluding the Scandis, the market sees some chance of a rate cut in Australia early next year and Canada by the spring, but other countries are assumed to be on hold until the summer.

Taking the average of those seven countries, the market sees only a 50-50 chance of rate cuts in the first half of next year. This may reflect A) the new “wait and see” view as central bankers assess the impact of what they’ve done so far; B) the fact that interest rates are already so low, further cuts have diminishing returns in some countries (Eurozone, Japan); and C) hopes that the US-China trade dispute ends relatively quickly and global trade gets back to normal.

With global interest rates generally on hold, volatility is likely to be subdued as well – there’s less reason to shift money in or out of any country. The implied volatility of most currency pairs has been declining, which shows that the market expects lower volatility in the future.

Speaking of the US-China trade dispute, last week it was the subject of frequent headlines as usual, but at the end of the day we are none the wiser about what’s going on. USD/CNY broke over 7.0 on Monday after somewhat negative news over the weekend and stayed there after Trump said on Tuesday that tariffs were “going to 15% very soon” if a deal wasn’t reached. Sentiment improved on Thursday after White House economic adviser Kudlow said the US and China are down to “short strokes” on a Phase 1 deal. It all sounds promising, but China has made rolling back some of the tariffs a precondition for the agreement and it’s not clear whether Trump will agree to that, nonetheless the US keeps insisting that they’re close to a deal. So net net, it’s still up in the air. The two sides held “constructive talks” on Saturday and more talks were scheduled on Sunday. The results of those talks were not available at the time of writing. USD/CNY above 7.0 suggests that the market is not yet convinced a solution is near. That means “risk off” probably dominates still.

As for AUD, the worst-performing currency of the week, much of its decline on a trade-weighted basis was because of selling of AUD/NZD when the RBNZ news came out. It then took another lurch down on Thursday when the Australian employment data came out worse than expected.

GBP on the other hand gained. News that the Brexit Party would not contest seats that the Conservatives won at the last election increases the possibility that the Conservatives get a majority in their own right at the December election. That’s important, because they probably don’t have any possible coalition partners this time. If they don’t though get a majority – and nothing is certain in this election – then we are probably back to Square One with Brexit.

This week: Not much on the schedule!

There’s not that much on the economic schedule this week. No major central bank meetings, although we will get the minutes of the latest Fed, ECB and Reserve Bank of Australia meetings. Those will allow us to get more of a sense of where central bankers stand: are they poised to ease further or, as mentioned above, now in a “wait and see” mode while they assess how their actions to date will affect the economy? I suspect the latter, which means less speculation about rate cuts in Australia and Canada. For example, in Australia, the Statement on Monetary Policy that was released after the meeting indicated that they discussed “the possibility that further easing could unintentionally convey an overly negative view of the economic outlook, or that the usual channels of policy transmission might be less effective at low interest rates.” Given that Australia and Canada are the two countries where rate cuts are expected next, I think these currencies could get a boost during the week if expectations about further easing fade.

The new ECB President, Christine Lagarde, Friday will deliver her first major speech since taking over the job. Investors will be looking for hints of what policy initiatives she might take and how her views and communication style might differ from her predecessor. That’s especially important as the ECB Governing Council seems to be divided on the value of further easing. With ECB interest rates already deeply negative, I expect Lagarde to make a plea for European governments to make more use of fiscal policy to boost the Eurozone economy. After all, the Eurozone as a whole is expected to have a fiscal deficit this year of -1% of GDP, well within the Maastricht Treaty limit of -3%. Germany is forecast to have a surplus of 1.0% of GDP and the Netherlands, 1.2%. And with negative bond yields in the shorter maturities in even the more fiscally troubled countries, there would seem to be plenty of room for governments to borrow money at a profit.

Former ECB President Draghi used to say that “In view of the weakening economic outlook and the continued prominence of downside risks, governments with fiscal space should act in an effective and timely manner.” It will be interesting to hear how Lagarde, who is more of a politician than an economist, puts it. Any signs that she might be more successful in getting the Eurozone to adopt a more expansive fiscal policy could be positive for the euro, in that it might mean faster growth (hence an earlier exit from QE/negative rates) and less dependence on monetary policy for growth. In addition to Lagarde, ECB policy makers Luis de Guindos and Yves Mersch, Chief Economist Philip Lane, and Bundesbank President and Chief QE Critic Jens Weidmann are all scheduled to speak too.

As for indicators, the main point of interest will be the preliminary purchasing managers’ indices (PMIs) for the major economies on Friday. The recent data suggests that economic activity in the developed world is contracting, but emerging market economies are still expanding. The Eurozone in general and Germany specifically are the major weak points, according to the data.

The Eurozone PMIs are expected to improve across the board, which would add to the sense that the Eurozone economy is past the worst (even if the EU manufacturing PMI remains in contractionary territory). EUR positive

There will also be considerable interest in the gap between Markit’s US manufacturing PMI, which still shows expansion, and the Institute of Supply Management’s version of that index, which is in contractionary territory. (It’s not released until 2 December; forecasts aren’t yet available.) Following the disappointing US retail sales and industrial production figures, the Atlanta Fed Friday downgraded its forecast for US Q4 GDP to +0.3% qoq SAAR, a sharp downgrade from +1.0% previously (which isn’t so great to begin with). The New York Fed’s estimate is 0.4%. The St. Louis Fed on the other hand is forecasting 1.5% Q3 was 1.9% qoq SAAR, so all of these would be a slowdown. Economists expect the Markit manufacturing PMI to show further expansion, but that would contradict what the Fed growth estimates are saying. A confusing picture.

Aside from that, the US sees building permits and housing starts on Tuesday and the Philly Fed index on Thursday.

Japan’s trade data comes out Wednesday morning their time, while the national CPI is released Friday morning. The national CPI is nowadays an afterthought after the Tokyo CPI for the month comes out.

Canada announces its CPI on Wednesday, while Senior Deputy Gov. Wilkins speaks on Tuesday and Gov. Poloz has a “fireside chat” on Thursday.

One point to look out for: on Saturday, Trump suddenly went to the hospital for an unscheduled examination. This was billed as just some routine tests, the first part of his annual physical exam, which is scheduled to take place in February. That explanation is bullshit. When someone goes for a physical, they have to do all the tests at the same time – the tests are never staggered, because then they would be invalid. It’s also noticeable that A) the film of Trump getting into the car shows him without a tie and with his shirt unbuttoned – have you ever seen a shot of him like that without a golf club in his hand? Furthermore many of the people who joined him are running. And he’s accompanied by the White House doctor. B) On the other hand, there was no police escort for the motorcade, suggesting that it was thrown together quickly. C) There’s a fully equipped medical office in the White House – they don’t have to go anywhere to do “routine” tests; D) The exam was not previously announced and his schedule for the day was suddenly ended; and E ) It was announced that Trump returned to the White House, but the pool reporter said he was not seen going in.

Speculation is that they needed to do some cardiac examinations on Trump, including lab work, that they couldn’t do in the White House office. It’s clear from what you can see on TV that Trump is having increasing medical problems: his gait, his posture, his speech are not that of a healthy person. Some people think a medical emergency could be a reason for him to step down and let VP Pence take over, followed of course by Pence pardoning Trump for any Federal crimes he may have committed (the President can’t pardon for State offences). I think we have to monitor Trump’s health closely. The impeachment proceedings could be damaging to someone with an already fragile heart.