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Market Briefing
Week Ahead: Risk On

Karl Schamotta April 16, 2018

Three themes we’ll be watching this week:

Bank of Canada’s Confidence Returns

Canada’s central bank is unlikely to hike rates on Wednesday – but last week’s surprisingly-sanguine Business Outlook Survey should give policymakers room to deliver a more-hawkish message. Wages are growing slowly, but overall employment remains strong, core inflation rates are converging with the official target, and overwhelming evidence exists to suggest that NAFTA-related fears have subsided across the business community. On a data-dependent basis, the Bank could signal a removal of accommodation before the end of the third quarter.

Canadian dollar strength could be limited however – additional monetary tightening has been priced into interest rate differentials for many months, and the country’s credit-creation engine seems to be slowing. Real estate-funded consumer consumption remains a major point of economic vulnerability and should continue to keep the Bank on a more cautious footing.

Declining Geopolitical Risk Premia 

Worries about conflict in the Middle East should subside further in the coming days, putting pressure on front-month oil prices, petro-currencies and safe-haven units alike. Friday’s attack by the United States, Britain and France destroyed Syrian military positions and research facilities linked to a chemical weapon – but was clearly-telegraphed and limited in nature.

In avoiding confrontation with Assad’s Iranian and Russian allies and stopping short of regime change, coalition attacks set the stage for a reduction in regional tensions – restricting the likelihood of supply disruptions that could upset the delicate balance that has recently emerged in oil markets.

Trade Wars Become Trade Bores: 

Last week’s dialled-down rhetoric from the Trump administration continued through the weekend, suggesting that the ‘shock and awe’ part of the campaign is giving way to low-intensity back-channel negotiations. In comments after the Summit of the Americas on Saturday, Vice President Pence said, “I’ll leave this summit very hopeful that we are very close to a renegotiated NAFTA…there is a real possibility that we could arrive at an agreement within the next several weeks”. Prime Minister Justin Trudeau echoed this, saying, “There is a desire and a recognition by all three NAFTA partners that the time-lines imposed upon us by both the upcoming, the imminent Mexican elections and the upcoming American midterms, means that we have a certain amount of pressure to try and move forward successfully in the coming weeks”.

This aligns with our belief that the “trade wars” meme that rocked commodity and equity markets over the last few weeks will soon fade into obscurity – with cat videos, Kardashian selfies and distracted-boyfriend photos moving back into the ascendant. Trade-related risk premia attached to the peso and Canadian dollar evaporated a long time ago, but both currencies could see further gains as market sentiment coalesces around a more optimistic view. This could generate short-lived opportunities for sellers who wish to lock in gains before fundamentals begin to reassert themselves – or until John Kelly unlocks Mr. Trump’s Twitter account again…

Have a great week!

Karl Schamotta

Counterparties: Background Reading

Next City: World’s Emptiest Airport Is a Red Flag
The Economist: The Smartphone and the Toilet
Reserve Bank of Australia: High-denomination Banknotes in Circulation
The Guardian: Berlin Tops World with Fastest Rising Property Prices
Bloomberg: China Shouldn’t Repeat Japan’s FX Mistake
Council on Foreign Relations: Machines, Skills, and US Leadership
IMFBlog: For Home Prices in London, Check the Tokyo Listings
American Economics Association: When the States and the Kingdom Became United
Reuters: ‘Boiled Frog Syndrome’: Germany’s China Problem

Catalysts: Scheduled Data Releases

08:30   ***      USD Retail Sales, March
12:00   *          USD Federal Reserve Speech, Kaplan
12:00   *          USD Federal Reserve Speech, Kashkari
13:15   *          USD Federal Reserve Speech, Bostic
21:30   *          AUD Reserve Bank of Australia Meeting Minutes, April
22:00   ***      CNY Gross Domestic Product, Q1
22:00   *          CNY Retail Sales, March

04:30   **        GBP Employment Change, February
05:00   **        EUR ZEW Economic Sentiment Surveys, April
09:15   *          USD Federal Reserve Speech, Williams
10:00   *          USD Federal Reserve Testimony, Quarles
13:10   *          USD Federal Reserve Speech, Evans
19:50   *          JPY Trade Balance, March

04:30   **        GBP Consumer Price Indices, March
05:00   **        EUR Euro-Zone Consumer Price Indices, March
10:00   ***      CAD Bank of Canada Rate Decision
10:30   **        USD Department of Energy Weekly Inventories
14:00   *          USD Federal Reserve Beige Book
15:15   *          USD Federal Reserve Speech, Dudley
16:15   *          USD Federal Reserve Speech, Quarles
21:30   *          AUD Employment Change, March

04:00   *          EUR Euro-Zone Current Account, February
08:00   *          USD Federal Reserve Speech, Brainard
08:30   *          CAD ADP Payrolls Report, March
08:30   **        USD Weekly Jobless Claims
09:30   *          USD Federal Reserve Testimony, Quarles
18:45   *          USD Federal Reserve Speech, Mester
19:30   **        JPY National Consumer Price Index, March

08:30   **        CAD Retail Sales, February
08:30   ***      CAD Consumer Price Indices, March
09:40   *          USD Federal Reserve Speech, Evans
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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