Good afternoon,
The week ahead in GBP
It’s becoming cliché to say that sterling has an important week ahead of it but once again focus will fall on lawmakers in Westminster this week as Theresa May’s Plan B on Brexit and proposed amendments from MPs are voted upon. The Brexit deal is not the newsworthy item here – afterall, Plan B is exactly the same as the plan that was voted down by a record amount earlier in the month – instead an amendment that prevents the government from exiting the EU on March 29th, extending the negotiation time further is the focus.
Initial reports suggest that the amendment has enough votes to be passed by the House and such optimism has been priced into sterling in the past week. As we noted last week, while reports from political circles suggest that the amendment has the votes to pass, we cannot be sure until Tuesday whether the amendment is selected by Speaker John Bercow and whether the order of any other amendments act as a spoiler.
If the amendment is no longer viable or offers the pause that markets are pricing in, then sterling will have no business being at the levels it currently finds itself at and Tuesday could be a painful day with GBPUSD returning to the 1.28s. On the other hand, smooth passage of the amendment may offer sterling a little boost higher, up to 1.33 in GBPUSD and 1.1750 in GBPEUR.
We do not think that Labour will follow up another defeat for the government with a re-run of a confidence vote.
The week ahead in USD
The government is open for business in the US again, although expectations are that this will only last until February 15th. In the meantime, discussions on spending and the border wall will continue between President Trump and Congress.
The most important discussions this week however remain the high-level talks between the US and China starting on Wednesday. There is little expectation out there that this week’s meetings will lead to a material change in the relationship between the two countries given how far apart they seem to be on matters such as intellectual property and the subsidies to State Owned Enterprises.
The data and news calendars will also prove interesting with both likely to show increased trade pressures and their effects on the wider global economy. Apple, Facebook and Amazon are set to report earnings as both the US and China report their latest manufacturing sentiment numbers with deterioration likely to boost haven currencies.
The week ahead in EUR
We think that the euro will spend a lot of this week struggling to shake off the weakness that was felt as a result of last week’s European Central Bank meeting. Draghi and the team in Frankfurt sounded a little more unsure on the European economy than some had thought. The killer line from ECB President was that ‘risks to the Bank’s outlook have moved to the downside’ since the last meeting.
Other members of the European Central Bank were quick to fall in behind their boss to sound similar calls of uncertainty. Bank of France members, Coeure and Villeroy, told a crowd in Davos that the European Central Bank may have to adjust its rate guidance at some point this year, that it was too early to discuss whether interest rates should be raised this year and that the ECB is likely to cut its growth forecast in March.
The euro will also be watching what happens in Westminster this week. Whilst the votes are solely the matter for UK lawmakers, nobody on the continent wants to see a no-deal Brexit and an extension will be seen as broadly positive.
The week ahead in CNY
As noted above in the section on the USD, the crucial thing for the Chinese yuan and wider Asian currencies will be the ongoing trade talks between the US and China that are set to restart on Wednesday. To repeat, we do not believe that a deal on trade is forthcoming soon and, although another 90 day extension to the truce could be announced in the coming weeks, the higher tariffs that are already in force will remain and will continue to hurt both the yuan and other trade sensitive currencies.
Thursday’s manufacturing sentiment report it unlikely to engender much positivity either. Chinese manufacturers front-loaded a lot of output last quarter and we would be surprised if there was not a falloff in orders, inventory and growth as a result.
The week ahead in JPY
Yen has retreated in the past few weeks as some of the pressures that caused investors to jump into safe haven currencies have weakened. Equity markets have found support at current levels, the Fed seems to be more willing to acknowledge the issues in both the US’s and the global recoveries and the noises around US/Chinese trade have improved.
That being said, there is a lot that could go wrong and hence the lack of yen selling for now. Support for the yen will come from the Bank of Japan softening its stimulus measures although we don’t anticipate this having too much of an effect until the middle of the year.
The week ahead in AUD
It’s going to be an interesting week for the Australian dollar and the currency has started the week on the front foot. Once again, the majority of this move is coming on the heels of additional Chinese stimulus over the weekend. That being said, Wednesday’s inflation release is the key data point for the currency this week and could easily decline by more than is currently expected, putting pressure on the AUD and the prevailing market belief that the next move from the Reserve Bank of Australia is to hike interest rates and not cut them.
Similarly, if Chinese manufacturing sentiment on Thursday morning is shown to have slowed on additional trade pressures and the run-in to the Chinese New Year then the AUD will be looking to move lower as well.
The week ahead in SGD
China news will be the overarching mover of most Asian currencies this week although the Singaporean dollar still has its own unemployment release to contend with with this Friday. We are with the consensus in expecting unemployment to remain at 2.1% and have little impact on the SGD for now. However, should the number surprise by showing greater employment then investors will start to talk about another tightening of monetary policy by the Monetary Authority of Singapore at its meeting in April.