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Weekly Market Briefing
Sound and the Fury

Karl Schamotta April 30, 2018

Currency traders will need near-bottomless supplies of Red Bull in the days ahead, with an almost-continuous series of potential volatility catalysts set to rock the markets:


The week will kick off early for Canada, with February gross domestic product data due for release on Tuesday morning. With the country’s central bank on a firmly data-dependent footing, any deviance from consensus expectations – currently set around +0.3 percent – could trigger a sharp move in currency markets. Risk is likely tilted to the upside, with a positive surprise carrying the potential to spark renewed optimism around a May rate hike – but

Market reaction could fade later in the day however, when Stephen Poloz steps onto the podium in Yellowknife (a sentence that we don’t often get to write). The Governor is scheduled to deliver what will be a closely-watched speech on household debt, responding to concerns raised in recent Monetary Policy Reports as he reviews vulnerabilities that have grown within Canada’s spectacularly-indebted household sector – but traders shouldn’t expect him to express any sense of alarm.

Policymakers have previously highlighted higher levels of interest rate sensitivity as a factor in keeping the Bank on a very gradual monetary policy tightening path, and Poloz will likely cite recent evidence indicating that debt accumulation has finally begun to slow. We remain convinced that a more profound rebalancing has begun, but for central bankers, the risk of disaster is shrinking – and the confidence game that is the Canadian economy requires continual positive affirmation.

Negotiations on the North American Free Trade Agreement will continue to simmer in the background, with many market participants poised to trade on any rumours coming out of discussions between Canada, Mexico and the United States. Hopes of a quick resolution to the issue faded somewhat over the last week when ‘sunset clause’ requirements found their way back into the debate – but with the clock running out on the Trump administration’s political mandate, the likelihood of compromise is growing. Progress toward an “in principle” deal won’t shift the playing field for fundamental investors in any decisive manner – but could catalyze a small rally in the currency markets as momentum traders capitalize on positive news flow.

Euro Area
Wednesday will be a big day for euro traders, with a slew of purchasing manager indices due for release ahead of a critical first-quarter gross domestic product report.

Overall euro-area growth is projected to slow from 2.7 percent in the previous quarter to 2.5 percent in the first quarter. Early-April manufacturing surveys from France, Germany, Italy, Switzerland and the euro area as a whole will be closely scrutinized for signs that the softness seen in early-year data was transitory. A cold winter, a German strike, transmission of the flu, and euro strength have all been mooted as possible explanations for the drop in retail sales, industrial production and business sentiment which occurred between December and February – but considerable uncertainty remains.

Technical conditions in the currency markets will also play a role. The euro-dollar exchange rate ran into solid support near the 1.20-threshold last week, and a sell-on-rumour / buy-on-news reversal could take place around Tuesday’s numbers, particularly in the event that data tilts in a positive direction.

United States

Any euro gains could be tested throughout the week, with personal consumption numbers, earnings reports, sentiment surveys, a rate decision, a Treasury refunding announcement and April employment numbers all carrying the potential to twist the dollar yield curve.

From a fundamental perspective, the core personal consumption expenditure number is projected to jump by an annualized +2 percent from 1.6 percent, and earnings, sentiment surveys and non-farm payrolls reports are all expected to illustrate an economy that is running very close to potential.

The Federal Reserve is not expected to take action on interest rates at the conclusion of its two-day policy meeting later in the day – but investors will review the accompanying statement for guidance on how the central bank’s reaction function is changing in response to inflation and economic conditions. Odds on a June rate hike are well above the 90-percent mark as we go to pixels, and communications from officials prior to the blackout period suggested that they were largely comfortable with this. Markets will be more interested in what the statement implies with respect to longer-term developments, but an earthshaking shift in narrative seems unlikely – meaning that recent gains in the ten-year Treasury should remain intact.

Investors seem increasing convinced that officials will keep inflation rates under control in the long run, but the Trump administration’s historic spending levels are stressing funding markets in the short run – and the Treasury’s quarterly refunding announcement will push even more issuance into already-tight markets on Wednesday, potentially propping short rates up and flattening the yield curve.

With America’s need for liquidity rising against incredibly-stretched bearish positioning, we would caution against standing in front of the dollar freight train in the days ahead.

Counterparties: Background Reading

Federal Reserve: Who Is Buying Treasuries?
Financial Post: Poloz Comfortable With Keeping His Powder Dry
Wall Street Journal: Iran, China Seek to Loosen Dollar’s Grip on Global Markets
Bloomberg: Here Come the Petrodollars, Back to Save Global Asset Price
Reuters: Oil Prices, or How I Learned to Stop Worrying and Embrace the Cycle
Journal of Economic Behaviour: Behavioral Bias in Number Processing
Project Syndicate: From Dollar to E-SDR

08:00   **        EUR German Consumer Price Index, April
08:30   ***      USD Personal Consumption Expenditure, March

00:30   **        AUD Reserve Bank of Australia Rate Decision
08:30   ***      CAD Gross Domestic Product, February
09:30   *          CAD Canadian Manufacturing Purchasing Manager Index, April
10:00   ***      USD ISM Manufacturing Index, April
14:30   ***      CAD Bank of Canada Speech, Governor Poloz
21:45   **        CNY Caixin China Purchasing Manager Index, April

05:00   *          EUR Euro-Zone Unemployment Rate, March
05:00   ***      EUR Euro-Zone Gross Domestic Product, Q1
05:00   **        EUR Italy Gross Domestic Product, Q1
08:15   **        USD ADP Employment, April
10:30   **        USD Department of Energy Inventories
14:00   ***      USD Federal Reserve Rate Decision

05:00   **        EUR Euro-Zone Consumer Price Indices, April
08:00   *          EUR European Central Bank Speech, Constancio
08:30   *          EUR European Central Bank Speech, Coeure
08:30   **        USD Weekly Jobless Claims
08:30   **        USD Trade Balance, March
10:00   ***      USD ISM Non-Manufacturing Purchasing Manager Index, April
10:00   **        USD Durable Goods Orders, March
12:00   **        CHF Swiss National Bank Speech, Jordan
21:30   *          AUD Reserve Bank of Australia, Statement on Monetary Policy

05:00   *          EUR Euro-Zone Retail Sales, March
08:30   ***      USD Non-Farm Payrolls, April
13:00   *          USD Baker Hughes Rig Count
20:00   *          USD Federal Reserve Speech, Kaplan

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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