‘Good Luck, We’re All Counting On You’: Full Week Ahead Preview

To be sure, whatever you thought was going to dominate the news flow in the week ahead is probably going to take a backseat to North Korea, for obvious reasons.

Pyongyang’s latest nuclear test means all eyes will be on Donald Trump’s Twitter feed and all ears will be perked up for any further statements like this one from Jim Mattis: 

So there’s the Secretary of Defense reiterating that America can wipe North Korea off the map tomorrow if need be and testing H-bombs that can purportedly be delivered via ICBMs is one way to get yourself into a lot of trouble with irrational actors like Donald Trump.

So there’s that and the early reaction in USDJPY and USDCHF reflected a palpable sense of angst among investors, although divining anything from those knee-jerk moves is notoriously difficult.

But North Korea isn’t the only thing on traders’ minds this week. Not by a long shot. There’s the debt ceiling debate and we’ll get the ECB along with the RBA (Tue), BoC (Wed), and Riksbank (Thu).

Needless to say, the ECB presents a lot of event risk for a euro that’s been the story of FX land for going on three months. Last week saw at least three attempts by policymakers to fine tune the message. On Friday alone we got Nowotny imploring traders to avoid “over-interpreting or dramatizing” the single currency’s rapid appreciation (which sent EURUSD higher into NFP) and then just hours later, some “euro-area officials familiar with the matter” were out saying that the governing council may not be ready to finalize their decision on next year’s QE until December. That latter “leak” served to reverse the euro strength precipitated by the weak jobs number in the U.S. All of that just a week after Draghi didn’t mention the FX risk at Jackson Hole. 

“We expect the ECB to remove the asymmetry on its asset purchase forward guidance, introducing upside risks to the EUR, but the size of the downward revisions to their staff inflation forecast could surprise investors, introducing downside risks for EUR,” Barclays writes, in their week ahead preview, before adding that “a further risk for the currency would stem from a lack of comment on the recent EUR strength, suggesting that the ECB is willing to look through further appreciation.”

Here are some bullet points from Goldman that underscore the indeterminacy:

  • We expect the ECB to leave its key policy rates unchanged at the September Governing Council meeting next week. We do not expect the ECB to announce any formal changes to its Asset Purchase Programme (APP), on this occasion. Rather, we expect Mr. Draghi’s comments at the press conference to signal that the APP will be tapered in 2018, noting that the Governing Council will decide on details regarding pace and timing in due course.
  • Growth indicators have remained robust since the previous ECB meeting in July (with area-wide Q2 GDP growth printing firmer than assumed in the June ECB staff projections).
  • While inflation has risen slightly (on both headline and core measures), underlying domestic inflationary pressure still appears subdued.
  • Updated ECB staff projections will be presented next week. The change in the conditioning assumption for the exchange rate is likely to play a key role. Overall, we expect the ECB staff to revise down its inflation forecast by around 0.1pp-0.20pp for 2018/2019.
  • We expect Mr. Draghi to make some general comments around the strength of the Euro, but refrain from making direct comments on market pricing. Mr. Draghi is likely to see some of the Euro strength as reflecting markets’ greater ‘confidence’ in the Euro area economic recovery.

So yeah. Good luck trading this. I’m not sure I’ve ever seen a setup that’s more conducive to algo madness.

Obviously, the Riksbank has to be careful. They’re effectively beholden to whatever the ECB does. As Governor Stefan Ingves told Bloomberg earlier this year, “when you are next to an elephant, you have to be careful.” Simply put: they have to remain as noncommittal as possible until Draghi tips his hand or risk unwanted krona strength that could derail inflation. Meanwhile, they have to keep an eye on the housing bubble. Here’s Barclays:

We expect the Riksbank to keep its policy settings unchanged at its 7 September meeting and to acknowledge that victory over weak inflation is in sight. We expect the SEK to sell -off around the event in a “buy the rumor, sell the fact” fashion as expectations for a more hawkish shift in the Riksbank’s language at this meeting will likely be disappointed, but we maintain our view of EURSEK depreciation over the coming quarters. The Swedish krona has appreciated by c.4.3% on a trade-weighted basis since the July meeting. The SEK has appreciated both as a consequence of a period of USD weakness and as recent positive developments in the economy challenged the use of SEK as a funding currency for carry trades, with EURSEK depreciating even in spite of the recent EUR strength.

Riksbank

And here’s Goldman:

The upcoming September meeting is not an obvious occasion for changing policy rates or bond purchases. In April, the Riksbank announced that bond purchases would continue until year-end. Given the Riksbank’s communication at its July meeting, a rate hike or cut would not seem imminent. Rather, the September meeting will be an opportunity for the Riksbank to take stock of the summer’s data and update its policy outlook. As there have been very few policy-relevant comments over the summer months from the Executive Board members, the September meeting (and Minutes) will contain much news on the Riksbank’s interpretation of the recent data.

We expect the Riksbank to view the data as representing positive news on the reflation process of the Swedish economy, while discounting some of the strength in the data surprises. On balance, we expect the Riksbank to revert to its pre-April policy rate path (i.e. the policy rate path the Riksbank had ahead of its downward revision following the April Executive Board meeting).

Again, this sets the stage for all kinds of algo madness in EURSEK on Thursday.

The RBA has to worry about FX strength. True, the Aussie fell for the first time in three months in August, and risk reversals dropped by the most since September of last year, but if you look at the top pane you can see why the RBA has been so defensive about FX strength ever since markets “misread” the July minutes and sent the currency surging:

Aussie

Also, don’t forget that the Aussie-U.S. 10Y yield spread is near the highest it’s been since America elected Pennywise, the orange-faced, nationalist clown:

AUUST

“In our view, the RBA is set to keep policy on hold when the board meets next week, extending the period of unchanged rates at record lows beyond a year,” BofAML writes. Here’s a bit more color:

… the policy discussion should get more interesting now that the forecast round is out of the way and the next Parliamentary testimony is six months away. There are some important data releases due in coming weeks that will test the RBA’s confidence in their outlook, notably GDP on 6 September, but it will be developments in housing and global events that should have more bearing on the Banks guidance. We expect a stronger signal that the next move in rates is up, but timing will depend in part on other central banks moving first.

On that last bolded bit, don’t forget what Lowe said in late July at a speech in Sydney:

Some central banks are now starting to increase interest rates and others are considering when to withdraw some of the monetary stimulus that has been put in place, [but] this has no automatic implications for monetary policy in Australia.

So there’s that.

And finally there’s the BoC. Simply put, they’re going to have to keep hiking although the timing isn’t a foregone conclusion. Here’s BofAML again:

The Bank of Canada has to embark on a hiking cycle. The Canadian economy is booming yet the overnight rate is well below any reasonable measure of neutral rate. And the reference rate is already increasing, as the US Federal Reserve is on a (gradual) hiking cycle itself. In this context, an inflation targeting central bank such as the BoC has almost no other option than to embark on a hiking cycle to keep inflation on target. But we expect a gradual hiking cycle, with the BoC hiking one more time this year and three more times in 2018, with the next hike on October 2017. This is a change with respect to our previous call of no more hikes this year. We now expect the overnight rate target to be at 1% by end 2017 and at 1.75% by end 2018 (vs 0.75% and 1.5% before). The economy is growing so fast that the risk to our new baseline is that the Bank of Canada decides to front load the hiking cycle, starting in September.

Ok, so if you don’t recall the context for this, we would encourage you to review some our previous posts here, but suffice to say things are going well despite jitters about a housing bubble and oil prices and lest you should forget, the BoC’s July hike was salt in the wounds of those who got caught up in a truly terrible bet against the loonie which, a recent period of softness notwithstanding, has rallied hard since the spec CAD short began to unwind in June. Basically, there’s drama around the BoC too.

All of that set against the backdrop of a Hermit State detonating what it says are H-bombs and a rogue administration in Washington with an itchy trigger finger. And the debt ceiling. And another hurricane approaching.

We don’t what to tell you other than: good luck, we’re all counting on you.

Full calendar via BofAML

Calendar

 

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