FX Week Ahead - back into the swing of things and all eyes on the UK next week
The start of the year has been showing promise in terms of volatility and the FX markets have outperformed in this respect, not least of all due to the sharp moves in the JPY seen in the first week of Jan. The JPY itself has been a little more restrained in the past week, though we had to expect some degree of moderation after market regulators expressed concerns over the speed of price moves and the liquidity traps which can cause undue stress in the markets as a whole. As such, USD/JPY covered a modest 107.80-109.10 range, compared to 104.80-110.50 the prior week!
What comes next largely depends on the stock markets, at is apparent that broader risk sentiment will dictate the fortunes of the JPY going forward as its traditional status as stock market proxy has been revived. We also note that with inflation rates around the world starting to soften once again, Japan's battle to revive inflation looks a little less unfavourable. Japan starts next week with a holiday on Monday (Coming of Age day) though later in the week - on Thursday - we get the latest CPI reading as of Dec.
However, this is not where the focus lies, as traders will be homing in on Tuesday's meaningful vote in the UK parliament on the Brexit deal which is currently on the table. Pundits expect the deal to be rejected, but parliament has now voted for the government to present its plan B (in the event of a no vote) within 3 days rather than the 21 days previously being the status quo. The cabinet has duly accepted, so through the week, there will be plenty of headlines and rumours which should make for a busy week for all GBP pairs.
In the meantime, optimism has taken over the Pound as there is at least one clear majority in that parliament largely agrees that no deal should not be an option at any cost. While Brexiteers try to play down the horror stories which have led to accusations of operation fear among Remainers, there will be major disruption both initially as well as in the longer term effects which could play through for many years to come.
Much hangs in the balance next week, so while we have seen GBP making ground in the last few trading sessions, sentiment can turn quickly and we could easily see the Cable move into the mid 1.2800's reversed pretty quickly. EUR/GBP could also turn right back into the 0.9000's again, though on Friday we saw 0.8930 support taken out, which represented the previous week's low.
Amid the Brexit drama, UK data focuses on inflation on Wednesday followed by retail sales on Friday, but if there was ever a time when data was very much on the back burner, it is now.
Onto the US, and as we saw last week, core inflation remains strong, even if the headline is heading lower due to the Oil price slump. As the latter has recovered, we can expect CPI figures to do the same, so along with strong employment and hopes of further wage growth, we cannot rule out another rate hike (or 2) from the Fed this year despite what the futures markets are showing.
The USD continues to resist a correction in line with reduced expectations of Fed hikes, though a large part of this is down to the lack of viable alternatives for investors and traders to sell against.
While the government shutdown continues, there are still a host of data releases which have been held back, and until we get more data - as the Fed wants the market to focus on - there is limited conviction in the major USD pairings other than GBP at the moment (for the reasons given above).
On the schedule for next week, retail sales and factory orders are the standout releases, with the Philly Fed manufacturing index and construction spending out on Thursday alongside the weekly claims data. Industrial production on Friday ends the week, though as above, we may well see some of the releases cancelled due to the shutdown.
More speakers from the Fed including chair Powell again on Monday. George speaks on Tuesday followed by the perma dove Kashkari on Wednesday, when we also get the Beige book which is expected to underline the health of the US economy - for now at least.
We did, however, see EUR/USD finally breaking out a little on the upside last week. 1.1500 gave way as a function of USD weakness and the rate repricing we mentioned above, but with the Eurozone economy still looking week, gains failed to hold and we are back under the figure.
We really need to see a turn in the data to get the market buying the EUR with any conviction, though we did see a strong rally in EUR/CHF which eventually took out 1.1300 though here also, we slipped back as sellers came back in.
EU industrial production is expected to show a contraction in Nov we released on Monday, and on Tuesday, GDP figures in both France and Germany are unlikely to show any promise near term. The annual German growth rate is expected to come in at 1.5%, and fears are that this could potentially turn into a recession. With French uprisings over Macron policy measures causing unrest and the Italian budget worries set to persist, there is very little to get excited over in Europe, with any Brexit resolution the only bright spot to consider - and that is a big if as we have noted above.
EU CPI at the end of the week is the second reading which is expected to confirm headline inflation at 1.6% while the core rate is stuck around a meager 1%.
There is little in the way of top tier data in either Australia or NZ next week, so both the AUD and NZD will continue to trade off the back of global risk sentiment. Both have recovered well - more so the AUD - after the prior week's sharp early Asia sell-off, with AUD/USD having tipped the 0.7200 mark. At the end of last week, despite a selective USD comeback, AUD seemed reluctant to give up its gains, while NZD was also firm in holding onto better levels - now comfortably over 0.6800.
The CAD was not so lucky, though after testing and rejecting 1.3660 a number of times over the Xmas and new year break, the reversal has been almost straight-lined. The move was contained at 1.3180 this week, and despite finding strong demand, sellers rushed back in to retest this impulsively and were punished. Friday's retest resulted in a stronger reversal, which was close to a cent on the day as Oil prices also backed off from their highs. WTI has, however, recovered well off the $42.50 lows seen in Dec, adding back $10 as per the highs seen last week.
Canadian CPI is the only major data release next week, released on Friday. Inflation is in to 1.7% here, and is expected to remain so. Until then, CAD will follow Oil and broader risk sentiment.