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Weekly Market Briefing
Easy Money?

Karl Schamotta October 23, 2017

With a lack of volatility setting records across a number of liquidity-flush financial markets, it would seem that investors are unworried about the global economy – but a sense of unease seems to be creeping in around the edges in the currency markets.

The Japanese yen is down sharply after Shinzo Abe won a two-thirds parliamentary super-majority, giving him the mandate to strengthen the currency-dilutive economic stimulus platform that has seemingly boosted growth over the past year. Carry traders colloquially known as “Mrs. Watanabe” are back in action, selling yen short against high-yielders across the emerging markets on the expectation that the Bank of Japan will continue its quantitative easing programme and the government will loosen fiscal policy further.

Canadian dollars are also trading hands at a sharp discount after Friday’s disappointing retail sales and inflation numbers raised serious questions about the sustainability of the economy’s summertime gains. After years spent over-leveraging, early signs suggest that households are getting the Bank of Canada’s fiscal prudence message, and the credit cycle appears to be turning – meaning that the debt-fuelled consumer spending that has long driven the economy could weaken dramatically through the winter.

Against this backdrop, Wednesday’s rate decision, Monetary Policy Report, and press conference will have traders on the edge of their seats. Policymakers will almost certainly respond to first-half momentum in upgrading growth and inflation projections, but will likely stop short of announcing another rate increase. Instead, Governor Poloz and Deputy Governor Wilkins could emphasize the Bank’s data-dependent stance, highlighting export weakness, falling consumption, and housing market moderation as risks that could derail monetary tightening plans over the next year. This could indicate that markets got ahead of themselves over the last few months in assuming a series of relatively-rapid hikes over the next year – and cheaper borrowing rates could put the currency under pressure through the latter half of the week.

The euro remains under pressure ahead of Thursday, when the European Central Bank is expected to announce a gradual unwind of its crisis-era stimulus programme. With growth forecasts being revised upward throughout the euro area, and a looming asset-scarcity problem looming ahead, markets have been preparing for this for months, meaning that a “taper tantrum” is unlikely – but major uncertainties remain around the speed and severity of the drawdown.

Until a few short weeks ago, traders had expected the Governing Council to announce a reduction in monthly asset purchases to 40 billion euros through the first half of 2018 – but in several recent speeches, Chief Economist Praet argued that a longer extension would be more appropriate. This shift in communications strategy helped to move markets onto a more dovish footing, and many now expect the Bank to buy 30 billion euros for nine months instead – keeping stimulus flowing into the end of third quarter next year.

Taken in sum, it seems that central banks are inclined to keep the monetary stimulus flowing for some time to come, suggesting that markets may have overreacted to policy signals over the past six months. Dovish turns from policymakers at the Bank of Japan, European Central Bank, and Bank of Canada could temporarily tilt interest rate differentials in the dollar’s favour, and keep global asset prices aloft for some time yet – but super-abundant liquidity levels are also masking growing stress in the financial markets. Forgive us our skepticism, but as the esteemed Notorious BIG would have put it – it’s like the more money we come across, the more problems we see.

Have a great week!

Karl Schamotta 

 

Catalysts

Scheduled Data Releases

TUE
04:00    **    EUR European Central Bank Lending Survey
04:00    *    EUR Markit Eurozone Manufacturing Purchasing Manager Indices, October
09:45    *    USD Markit Manufacturing Purchasing Manager Indices, October
20:30    **    AUD Consumer Price Indices, August

WED  
04:30    ***    GBP Gross Domestic Product, Q3
08:30    **    USD Durable Goods Orders, September
10:00    ***    CAD Bank of Canada Rate Decision, Monetary Policy Report
10:30    **    USD Department of Energy Weekly Inventories
11:15    ***    CAD BOC’s Poloz and Wilkins Hold Press Conference in Ottawa    High

THU      
07:45    ***    EUR European Central Bank Rate Decision
08:30    ***    USD Weekly Jobless Claims
08:30    **    USD Advance Goods Trade Balance, September
19:30    *    JPY National Consumer Price Indices, September

FRI   
03:15    *    EUR European Central Bank Speech, Praet
08:30    ***    USD Gross Domestic Product, Q3
08:30    ***    USD Core Personal Consumption Expenditure, Q3
10:00    *    USD University of Michigan Consumer Confidence, October
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.

 

Counterparties

Background Reading

The Economist: How Should Recessions Be Fought When Interest Rates are Low?
Bloomberg: Wall Street’s Robots Still Have a Lot to Learn About Being a Human Trader
Quartz: Bitcoin’s Latest High Makes Satoshi Nakamoto the 247th Richest Person in the World
MIT: AlphaGo Zero Shows Machines Can Become Superhuman Without Any Help
Foreign Policy: Can Congress Block Trump if He Pulls Out of NAFTA?
VoxEU: 323 Years of UK National Debt
Kionecki: Why Bitcoin ATMs in Kenya are Dead on Arrival
New York Times: A Nafta Battleground on the Shores of Canada
CNBC: Machine Learning Could Lead to Economic Hypergrowth

 

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