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Market Briefing: Calm Before the Storms?

Karl Schamotta April 23, 2018

With trade and geopolitical fears fading from markets, we’ll be watching three key events in the week ahead:

BoC Testimony 

Bank of Canada Governor Stephen Poloz and Deputy Governor Carolyn Wilkins will testify in front of the House of Commons Standing Committee on Finance on Monday and the Senate Standing Committee on Banking, Trade and Commerce on Wednesday. This is an exercise theoretically meant to explain the central bank’s decisions to the people’s elected representatives – but in practice, the Bank’s tightly-scripted comments are typically followed by questions from politicians which are designed to throw shade on the opposing party’s agenda.

In previous testimony, central bankers have been asked about major influences on the Canadian dollar, but in triggering largely-anodyne discussions of the tug-of-war between interest rates and oil prices, this hasn’t tended to have a material effect on the exchange rate. Rising inflationary pressures could also provide fodder for discussion, but Bank representatives have consistently said that the effects of minimum wage increases and higher energy prices are likely to prove highly-transitory – keeping price growth within the target range.

Household indebtedness will also likely fade into the background, leaving one of the major questions facing the Canadian economy largely unanswered.

Instead, trade issues are likely to loom large, with intense questioning on NAFTA-related uncertainties helping politicians set the stage for oblique criticism of the Liberal government’s negotiation strategy (and pipeline policies). Poloz and Wilkins will seek to underline the cooling effects that trade doubts are having on business confidence – but will also do their best to avoid stepping into the political arena. Data-dependent caution will remain the operative strategy for now, meaning (in the absence of a communication error) that any discernable effects could be bullish for the loonie.

ECB Decision

The European Central Bank will release its most recent decision on Thursday morning, and market participants are expecting the statement to remain largely unchanged – marking a sea change in perceptions relative to where the year began.

Last year’s economic acceleration has now faded, with growth numbers, confidence indicators and inflation levels disappointing market expectations throughout the first quarter. Exchange rate appreciation seems to be reducing the pass-through effects of higher energy prices while taking a toll on the euro area’s current account surplus – giving Draghi & S.p.A. more breathing room than had been previously expected. Although the existing programme ends in September and asset purchases are still expected to fall to zero by the end of 2018, there is no compelling reason to modify forward guidance at this point in time. The euro-dollar exchange rate looks set to remain tightly rangebound – requiring something other than central bank policy to provide the catalyst for movement.


The United States releases its initial estimate of first-quarter gross domestic product on Friday. Markets are expecting a profound slowdown, with headline growth dropping to 1.9 percent from last quarter’s 2.9-percent rate. Several consumption indicators plunged in the first quarter, suggesting that tax cuts and fiscal stimulus have had a minimal impact on consumer spending thus far, and softness in the Atlanta Federal Reserve’s nowcasting model seems to support the market’s bearishness – but in our view, a weaker print is unlikely to shake the central bank’s commitment to raising rates on a quarterly basis through the year.

Fixed-income traders continue to assign roughly-25 percent odds to an interest rate hike next month – so the report could prompt some “twisting” in the yield curve, impacting short-end rates, while leaving the long end largely intact. From a positioning perspective, we would be most wary of a positive surprise – a spike in short rates could have a flattening effect and will unleash another round of noise from pundits around potential inversion in the curve. We would caution against reading too much into this phenomenon, however – some tightness is natural at this point in the economic cycle, and the entire curve is moving upward, suggesting that markets remain broadly optimistic on the American economy.

Taken in sum, after receiving a solid drubbing from Trump’s stubby Twitter-fingers over the last month, risk appetite looks likely to continue a tentative return to markets in the coming days. Currency hedgers should consider using this opportunity to put strategies in place before the heat rises, bringing summer storms (and temper tantrums) back to the markets.

Have a great week!

Karl Schamotta

Counterparties: Background Reading

Reuters: Crypto Trading Tumbles as Investment Scramble Unwinds
Wall Street Journal: How Switzerland Lost a Currency Battle, but Won the War
Quanta Magazine: Machine Learning’s ‘Amazing’ Ability to Predict Chaos
The Atlantic: Whirlwinds of Speculation
Project Syndicate: The “Next Eleven” and the World Economy
Financial Post: Canadians Warned to Climb Out of Debt Before It’s Too Late
American Economic Association: When the States and the Kingdom Became United 

Catalysts: Scheduled Data Releases

10:00   *          EUR European Central Bank Speech, Coeure
15:30   ***      CAD Bank of Canada Testimony, Poloz and Wilkins
21:30   *          AUD Consumer Prices Indices, Q1

10:00   ***      USD Consumer Confidence Index, April

10:30   **        USD Department of Energy Weekly Inventories
16:15   ***      CAD Bank of Canada Testimony, Poloz and Wilkins

07:45   ***      EUR European Central Bank, Rate Decision
08:30   ***      EUR European Central Bank Briefing, President Draghi
08:30   **        USD Weekly Jobless Claims
08:30   **        USD Durable Goods Orders, March

00:00   **        JPY Bank of Japan, Rate Decision
01:30   *          EUR French Gross Domestic Product, Q1
01:45   *          EUR European Central Bank Speech, Mersch
02:45   *          EUR European Central Bank Speech, Lautenschlaeger
03:55   *          EUR German Unemployment, April
04:30   **        GBP Gross Domestic Product, Q1
08:30   ***      USD Gross Domestic Product, Q1
08:30   ***      USD Core Personal Consumption Expenditure, Q1
10:00   *          GBP Bank of England Speech, Governor Carney
10:00   *          USD University of Michigan Consumer Sentiment Survey
13:00   *          USD Baker Hughes Weekly Rig Count

Note: Asterisks indicate our preliminary estimate of the potential market impact associated with each event. One asterisk indicates an event with the lowest, two for a moderate impact, and three for the highest expected impact.

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