FX Insights 11/6 - 11/10

The US dollar weakened, equities stumbled, and yields rose last week as congressional developments on the tax bill renewed pessimism on the passage of the meaningful reforms.

Senate and House Republicans have released their own versions of the tax bill differing in key areas including the timing of corporate tax cuts and international tax rules.  Most crucially the Senate bill proposes a delay in the tax reform until 2019, which would clearly delay any immediate positive impact on the economy. Eventually the Senate and House will need to reconcile the differences to create one bill that can gain support in both chambers, a picture which becomes even more complex given the key democratic victories in last week’s elections.  Overall, the uncertainty surrounding the potential of tax reform led the Dow and the S&P to close the week lower, snapping the longest period of weekly gains in four years.  While tax reform continues to loom over markets, the US sees important economic releases on consumption and inflation. The data is not expected to alter the immediate course of interest rates, but will be important to gauge as one-time hurricane effects begin wearing off on data.

The UK also sees inflation and consumption data released this week along with employment and earnings data. Elevated inflation in the UK recently led the Bank of England (BoE) to raise rates in what many saw as a dovish hike. The bank remained cautious as price pressures remain externally driven and uncertainties weigh on the economic outlook. Supporting their view were comments from the Organization for Economic Co-operation and Development who noted their clear risks of a slowdown in the UK. Consumer prices, retail sales, and average earnings released throughout the week should illustrate the footing for households and businesses in the face of these concerns. Pressures continue to mount on Prime Minister, Theresa May, as reports surface of discord within the ranks of the Conservative party which is muddying the path for BREXIT.

Along with the US and the UK, the Eurozone sees inflation data printed this week as well as preliminary GDP estimates. Meddling inflation had led the European Central Bank to retain an accommodative bias despite recently scaling back asset purchases. Positive surprises in both inflation and growth could help restore positive sentiment to the euro as the central bank remains data dependent. The lack of any substantial political developments within the EU means the euro should enjoy a near term reduced risk outlook relative to its American and British peers.

Sentiment amongst Canadian purchasing managers rose at their fastest pace since Jan ’16 in October, suggesting that confidence over the outlook for the economy is on the ascent.  Meanwhile, Bank of Canada Governor, Stephen Poloz, maintained a neutral stance on the future interest rate moves in comments made last Tuesday. Markets await a speech by Deputy Governor, Carolyn Wilkins, this Wednesday and consumer price data Friday. While inflation—currently at 1.6%—is within the central bank’s target range, it remains some distance from the bank’s ideal midpoint of 2%, which the bank expects to reach in the second half of 2018. If inflation can show signs of reaching that level sooner than expected it should provide a boost to the Canadian dollar.

In what could be a risk event for markets, major central bank leaders Janet Yellen, Mario Draghi, Mark Carney, and Haruhiko Kuroda will all speak on a panel in Frankfurt on Tuesday. Given the fact that price data is released for several of the major economies this week, there will be a particular emphasis on the perspective of the central bankers towards inflation. Carney will also speak with other BoE colleagues in England on Thursday while Draghi will speak again in Frankfurt on Friday.

Sources: Bloomberg, Wall Street Journal, Reuters, Barclays, Bank of America, Econoday, 4cast

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