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Market Briefing
Week Ahead: Corrective Action?

Karl Schamotta March 26, 2018

A fairly light data calendar beckons in the days ahead, meaning that background issues will likely play a pivotal role in driving currency market volatility – with a slow-motion rebound from last week’s risk selloff looking increasingly likely.

Through the week, the United States is slated to auction about $294-billion in bills and notes, in what may be the largest supply ever offered in such a tight timeframe. This comes as markets seem to be losing the appetite for debt instruments, and could trigger an additional rise in short-term rates – but with the flood of issuance widely expected, funding risks are likely priced in.

On Wednesday, the third fourth-quarter gross domestic product estimate will be released, with minor revisions expected. The personal consumption expenditures report for February will be dropped a day later, with most observers projecting weaker numbers after January’s tax reform-boosted results. Consensus forecasts are for a 0.4 percent month-on-month increase in personal income and 0.2 percent rise in personal spending – with core personal consumption expenditure index (the Federal Reserve’s preferred inflation measure) rising 1.7 percent on a year-over-year basis.

Also on Thursday, Statistics Canada will print its January gross domestic product report. Markets expect growth to slow further, dropping to 2.9 percent from December’s 3 percent number. In a consumption-led economy like Canada’s, holiday spending often delivers a boost, and the effect was likely exaggerated as households pulled real estate-related borrowing activities forward ahead of the government’s new macroprudential measures (which went into effect in January). A surprisingly-soft report could put pressure on the Canadian dollar, but the exchange rate should continue to receive support from higher oil prices. Last week’s appointment of the notoriously-hawkish John Bolton to White House National Security Advisor has raised the likelihood that the United States will abrogate the Iran nuclear deal – and has raised risk premia in crude markets on a global basis.

More broadly, after firing an initial salvo in what is increasingly being called a “trade war”, the United States and China will move onto a negotiation footing, with officials discussing finer policy points behind closed doors.

Recent history may provide useful context when it comes to trading this story – around two-thirds of the steel taxes, and over half of the aluminum tax has been suspended since Trump broadcast his initial threats. After running into stiff domestic opposition (and without any major concessions from trading partners), total taxes will now add less than three cents to the price of a six-pack of beer – and all of the currencies that had initially sold off have now recovered ground.

With announced tariffs impacting less than 3 percent of Chinese exports, and an even more-modest $3 billion in American exports, the fundamental impact associated with the latest round of threats is diminishingly-small. A misstep is possible, but with the Trump team playing checkers against the culture that invented Go, a lasting escalation in tensions seems unlikely.

Just as we did when Brexit referendum was announced two years ago, we would caution against overreacting to developments in the political sphere – more often than not, the noise obscures the signal.

Have a great week!

Counterparties: Background Reading

Bloomberg: The Population Bomb Has Been Defused
Reuters: How the iPhone Skews US Trade Deficit
Quartz: Tariffs Now Exempt Most of US Imports
SSRN: Foreign Safe Asset Demand and the Dollar Exchange Rate
Bank for International Settlements: Dollar Funding of Global Banks
Bloomberg: Uninsured Mortgages Keep Surging in Canada
The Economist: Corporations Come Out Against Trump’s Tariffs
Project Syndicate: Working Toward the Next Economic Paradigm

Catalysts: Scheduled Data Releases

10:00               ***       USD Consumer Confidence Index, March
11:00               *            USD Federal Reserve Speech, Bostic
21:00               *            CNY People’s Bank of China Speech, Deputy Governor Pan

08:30               ***      USD Advance Goods Trade Balance, February
08:30               *          USD Gross Domestic Product, Q4 (Third Estimate)
10:30               *           USD Department of Energy Weekly Oil Inventories

00:00               *          CNY Current Account Balance, Q4
03:55               **         EUR German Unemployment, March
04:30               *          GBP Gross Domestic Product, Q4 (Third Estimate)
08:00               **        EUR German Consumer Price Index, March
08:30               ***      CAD Gross Domestic Product, January
08:30               ***      USD Personal Consumption Expenditure, February
08:30               *          USD Weekly Jobless Claims
10:00               **        USD University of Michigan Sentiment, Early March
13:00               *          USD Baker Hughes Weekly Rig Count
13:00               *          USD Federal Reserve Speech, Harker

21:00                           CNY Purchasing Manager Indices, March

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.