The week ahead in GBP
Theresa May’s triple vote plan was the biggest news for Brexit since the defeat of the government’s Withdrawal Agreement plan in January. While the votes themselves are not due until the 12th, 13th and 14th, the next week will see political positioning on both sides of the argument and, as we all know, a week is a long time in politics.
Our expectation remains that the 14th will bring an extension to the Article 50 period but there is not an insignificant chance that enough MPs will rally behind the Prime Minister’s deal on the 12th to avoid this happening – particularly if the European Research Group decide that any Brexit is better than a delay to their avowed desire to be free of Europe by March 29th.
Last week’s data picture was enough to confirm that the UK economy will struggle to do better than stagnate in Q1. Friday’s manufacturing PMI showed that the sector is stockpiling ahead of anticipated disruption to supply chains. While a positive outcome may come in the next few weeks the level of stockpiling will likely hamper a strong rally in overall growth as inventories are run down, depressing prices and margins – this is something that could also stymie the recent strong jobs numbers as well.
This week’s focus will be Tuesday’s services PMI. January’s reading narrowly missed falling into contractionary territory and was boosted by January discounting retailers, we expect that February’s number could see the first contraction since the referendum in 2016. Sterling’s reaction may be enough to show lawmakers what is at risk if they do not get their acts together.
The week ahead in USD
The delays to data gathering posed by the US government shutdown are coming to an end and, with it, so is a stronger USD. Last week’s GDP data showed that the US remains a strong outlier globally in terms of growth and that, for all the chatter about recession conditions and the need for the Federal Reserve to slow the path of its interest rate increases, some of the concerns may have been overdone of late.
The standout note in the growth report was the level of consumption and overall domestic strength. Trade does remain an issue and whilst the decision to extend the current truce on trade between the US and China is a welcome development, there are many more miles to travel before we can say that the matter is resolved. Tensions in the White House between President Trump and US Trade Representative Lightizer may boil over soon as they both seek very different things from the negotiations. The President wants an electoral win, the trade professional wants long-lasting structural reforms. What the consequences may be when this conflict of interests reaches a head, is anyone’s guess.
It is suggested that China and the US will take another run at each other in the next three weeks.
The key data point for the USD this week will be Friday’s jobs report. Following quite a depressing winter of economic data, a strong number here could be worth a lot more than a strong number usually is. Bringing some of the more pessimistic analysts of the US economy around to a more balanced view, and laying a foundation for a continued drive onwards by the US dollar, will give a strong number more weight.
The week ahead in EUR
The first two months of 2019 have been incredibly frustrating for those of us who entered the year optimistic on the single currency. Like everyone, the Eurozone economy took one in the teeth towards the end of 2018 but we are still waiting on the bounce in Europe that has been seen elsewhere.
Expectations remain that the ECB will need to add stimulus to the Eurozone economy in the coming quarters unless there is a dramatic increase in both growth and inflation that we do not foresee appearing anytime soon. This stimulus would likely take the form of increased lending to Eurozone banks in the form of Term Limited T Repo Operations (TLTROs) in order to spurn another impulse of cheap credit and increased spending.
We do not expect this to happen at this Thursday’s meeting however, with intervention limited to ECB President Draghi’s press conference in the immediate aftermath of the Bank’s vote to hold policy as is.
When looking at Europe we must also remember that China is not the only country that the US is focusing its fire upon regarding trade matters. While we see the chance of an increase in trade tariffs on European cars as a non-central scenario at the moment, further hints that the export-focused industries of Europe may be in for tougher times will generate downside for the single currency.
The week ahead in JPY
Despite multiple expectations that they may be likely to do so, the Bank of Japan looks set to hold off any additional stimulus. An interview with Bank of Japan Governor Kuroda saw him lay out what the Bank of Japan could do, but we think that most remain long-shots for now, especially given the recent strong retail sales data bringing some well-needed positivity to the Japanese economic picture.
Japan is one economy that is watching developments between the US and China and the US and Europe on trade closer than most from both an economic and currency point of view. Greater trade tension is a double whammy for Japan as investors mark down Japanese exporters’ shares and buy the yen as a safe haven from a slower global economic picture.
Last week’s trade truce allowed the yen to weaken a little and, with further softness of a fudged deal between the US and China without meaningful structural reform, we would expect these losses to continue.
The week ahead in CNY
Tuesday will see China’s National Policy Congress begin in Beijing. The announcements that will matter most to yuan and the wider global economy will be those on China’s growth target in the coming year, any additional stimulus and spending from central and local governments, structural reforms to re-engineer the Chinese economy and the housing market.
In all likelihood, the Chinese government will cut its growth forecast for the coming year to 6%. This has been seen as likely for a while now and so the market reaction may be limited following such an admission, although extra stimulus will grab headlines and likely sweeten the bad news.
The extension of the truce on trade was greeted with little fanfare by the yuan and we expect the currency to remain tightly traded over the course of the National Policy Congress this week.
The week ahead in AUD
The Reserve Bank of Australia meeting this week is very unlikely to see a change in borrowing costs down under. Whilst the recent strong jobs number was enough to smooth out some of the negativity in the AUD of late, markets remain positioned for a cut in interest rates in Australia sometime in the coming year; we just don’t think that it will happen this week.
The week ahead in SGD
The Singaporean dollar is set to follow the global atmosphere on trade and risk in the coming week with a quiet data week. Notes from both the National Policy Congress in China and the US jobs report will matter more than what is going on locally.
Have a great week.