
FX Commentary - October 23, 2017
Last week marked the 30th anniversary of Black Monday, October 19th, 1987, when stock markets around the world crashed and the Dow Jones Industrial Average and S&P 500 saw their largest one –day declines in history. Given current valuations across equity markets and years of quantitative easing by central banks superstitious investors couldn’t be blamed for keeping their fingers crossed through the week. Luckily, it seems the random walk guiding markets continues to keep avoiding all the ladders and windows as US stocks continued into record highs. In tandem, the dollar advanced against its peers and treasury yields rose as a budget resolution reached by the senate encouraged optimism on tax reforms.
On the data docket the US saw positive reports from regional manufacturing surveys and initial claims data—the latter of which hit a 4 decade low. Yet, in spite of the strong readings the main headlines driving last week’s action came out of Washington DC, where Senate Republicans passed a budget resolution marking the first step towards the long-anticipated tax overhauls and President Trump concluded a series of meetings with leading candidates to chair the Federal Reserve. Trump is speculated to make his final decision possibly as soon as this week, with the choice potentially disruptive to markets. Outside of the Fed chair race and continuing political developments, markets will see important updates this week on the US economy coming from Tuesday’s PMI’s, Wednesday’s Durable Goods Orders, and Friday’s GDP print. The impact of the hurricanes are expected to weaken GDP growth in the third quarter but various measures so far have shown resilience in spite of the disasters so there is room for upside on this reading which could encourage further dollar strength.
The euro traded largely within a range last week in spite of broad dollar strength and the unresolved dilemma in Spain. Last Thursday Catalan leader Carles Puigdemont failed to clarify his position on secession, forcing Spanish Prime Minister Mariano Rajoy to seek to temporarily suspend the region’s autonomy. Even as the crisis deepens markets have looked on as the European Central Bank is set to take center stage this Thursday. For the first time in years the central bank is expected to announce what will happen to its quantitative easing program going forward. Markets will be focusing on the amount of reductions in bond purchases as well as the timeline of the taper. Following the announcement ECB President Mario Draghi will be holding a press conference, and markets will be parsing his words carefully for any further indications of policy guidance.
Prior to the ECB, the Bank of Canada releases its interest rate announcement and quarterly monetary policy report on Wednesday. The bank is expected to hold rates steady after hiking rates in its previous two meetings, but a recent downturn in data highlighted by last week’s miss on consumer spending and inflation has slightly obscured the future path of hikes. With recent hints of dovishness by Bank of Canada officials, markets will be paying close attention to Bank Governor Stephen Poloz’s language during his press conference as well as to the forecasts in the Bank’s Monetary Policy Report. Any indications of increased caution will weigh on the Canadian dollar as there are no other major economic releases for the country this week.In the UK, Brexit difficulties continued weighing on the pound as no breakthrough has been made in the first phase of negotiations. Domestically, persistent inflation continues to outpace earnings growth, putting a squeeze on consumers as demonstrated by September’s weak retail sales figures. Such news certainly hasn’t boded well for the pound, enabling a vicious cycle of sorts as a weaker currency further spurs inflation. Moreover, with the current state of the consumer, the Bank of England will be hesitant to enact premature policy changes which could restrict credit and further throttle consumption. Aside from political developments, third quarter GDP released this Wednesday will be the main risk event for the pound.
In Japan, Prime Minister Shinzo Abe won a new mandate from voters as his coalition secured a convincing victory in parliamentary elections. The result pushed Japanese stocks to a record 15th straight day of gains as the yen declined. After suffering a drop in approval ratings stemming from corruption allegations, Abe now seeks to push forward many of his proposed reforms including his contentious constitutional revision. The stable political outlook in Japan suggests that markets will take a risk-on outlook for the country with significant shocks to dollar-yen coming from geo-political risks.
Sources: Bloomberg, Wall Street Journal, Reuters, Barclays, 4cast
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