Week Ahead: Flash PMIs and Eurogroup to Dictate Pace

Monday, April 20
BOC Governor to Participate in Commodity Supercycle Panel in NYC
Bank of Canada Governor Stephen Poloz will head to New York to be part of the panel discussion at the Bloomberg Americas Monetary Summit. The topic of his speech will be ‘Navigating the Commodity Supercycle.’ The BOC Governor is scheduled for two events this week. He opens the schedule in New York on Monday and will end his U,S. trip with an appearance at the Export-Import Bank of the United States, in Washington DC.

The so called ‘Commodity Supercycle’ is the period from 2002-2008 when commodity prices doubled or more following the rise of Emerging markets, most notably China. Energy, metals and agricultural products all of which are produced by Canada helped the country navigate the 2008 credit crisis. The price of commodities has been on the decline ever since, with a slight recovery in 2010. The Canadian economy as a main exporter of natural resources has been left further exposed to the headwinds from other major economies. Lower demand from China has hit commodity producers such as Australia and Canada. The price of oil has been caught in a market share squabble between the OPEC and the rest of the world that have driven up production to record levels.

Low food and energy prices have keep global inflation under control, but have put economic pressure on commodity dependent nations. The BOC Governor has urged Canadian manufacturing to take advantage of the weaker currency and recapture lost marketshare. Easier said than done as manufacturing investment has been reduced after the CAD reached parity with the USD.

The main draw of the Bloomberg event will be to see what Governor Poloz thinks about the Supercycle. The quarterly monetary policy report published by the Bank of Canada this week paints an optimistic picture for the economy, which implies a recovery of energy prices. The central bank forecasts this recovery as early as 2016, but the calculations might be based on the current rise of crude and not fully price in the effects of lower demand being the new normal or shifts such as Iran’s return to oil production.

Tuesday, April 21
German ZEW Expected Optimistic Despite Grexit Fears

The German ZEW survey has shown confidence on the economic recovery of Germany and the eurozone remains high as it has moved in an upward trend month to month. The latest two readings have failed to meet expectations but that has been attributed with the uncertainty surrounding the Greek debt agreement talks. Greece is nowhere near reaching an agreement with an end of April deadline looming. Greek negotiators with Finance Minister Yanis Varoufakis are still playing hardball to the amazement and annoyance of international lenders.

German consumer sentiment continues to be high as the domestic economy has managed to avoid the worse of the credit crisis. European stock markets have enjoyed a rally after the announcement of the much awaited European Central Bank quantitative easing program launched last month. The DAX endured a hard session after logging its worst week (-2.58%) in three years after the combination of Greece and China new trading rules.

The ZEW survey next week will once again be another example of the disconnect between Germany and the rest of the Eurozone.

Wednesday, April 22

Flash PMI to Pressure PBOC on Further Stimulus

The advance release of the Chinese purchasing manager’s index (PMI) dissapointed last month as it dipped into a 11 month low with a reading of 49.2. The factory sector is struggling to gain traction and get back above 50 which would signal expansion. Economists were expecting it be in the 50.6-8 range. The Chinese government has pushed a new normal for growth expectations from what is seen as a pre-emptive move ahead of missing the 7 percent growth target for 2015.

A below forecast flash PMI of 49.4 would put further pressure on the People’s Bank of China to launch further stimulus measures to avoid the economy slowing down even further. Further rate cuts are expected along with lower reserve requirement ratios for Chinese financial institutions.

Thursday, April 23
Flash PMIs to Show Again Europe in Two Speeds of Recovery
The European factory output expectations have risen after positive figures last month. No surprise in Germany leading the charge. The reward has been an upgraded forecast to beat at 53.1 from the Markit flash German PMI. France has failed to beat expectations but it continues to improve on a month to month basis. The flash reading is an incomplete picture but the French and German data are good indicator of the state of the two largest economies.

The different growth paths of Germany and France are telling as Europe is struggling to regain traction. The European Central Bank launched their QE program with the aim to stimulate growth in all markets, but it has always been the case that bigger market are better positioned to reap the benefits of the easing program.

Fri Apr 24
Greece Fails in Washington Negotiations Next Round Eurogroup

Greek debt will be the main topic during the Eurogroup meetings next week. Bond yields have fallen in the rest of Europe as investor demand more yield form Greek bonds. Various finance ministers from the Euro zone have spoken out about the lack of clear reforms from Greece. The IMF also issued a stern statement about its negative about writing off Greek debt. All comments converge on the same point. Greece must get to work and come up with a series of reforms that bring the country to a more stable economic reality. There is little hope in the market that the Greek situation will be solved next week, but there are some hints that Greece is working towards more realistic reforms geared at servicing its debt.

Speaking in Washington Greek Finance Minister Yanis Varoufakis is trying to get lenders to delay their required payments in an effort to come up with the cash. The lenders as the IMF bluntly put will not write off any debt. Even with such a negative Greek PM Alexis Tsipras is still confident a deal con come in April. Fears of a Grexit continue to rise as more finance ministers and leaders continue to express their frustrations with a Greek contingent that seem to be unfazed by the looming deadline. Varoufakis comment on what Greek is willing to do to make a deal work sums up the situation. “compromise, compromise, compromise without being compromised”.

BOC Poloz To Speak at Export-Import Bank in Washington

Bank of Canada (BoC) Governor Stephen Poloz will take part in a panel discussion at the Export-Import Bank of the United States in Washington, D.C., on April 20.

Poloz has been a supporter of the exporting sector and has used rhetoric and monetary policy to boost the competitiveness of the Canadian economy. The fall in energy prices is forcing the country to diversify its economy in a bid to regain its manufacturing strength. A weaker currency will help toward reducing the country’s dependency on energy exports, but the latest forecast from the BoC might be too optimistic on the timetable of the recovery.

The setting at the Export-Import Bank panel will help Poloz push Canada’s export agenda. The market’s reaction to the BoC’s latest quarterly forecasts wasn’t nearly as optimistic. What the BoC views as increasing economic strength can quickly fizzle into a reversal if Canada’s growth misses such lofty expectations.

The central bank held its benchmark interest rate at 0.75%, allowing plenty of room to act if needed. On that score, market participants widely expect both Australia and Canada to slash their respective interest rates in the not-too-distant future.

The Reserve Bank of Australia, despite an encouraging employment report, is expected to cut rates at its next meeting in early May. The BoC rate cut will be more data dependent as the USD/CAD is currently higher after soft data out of the U.S., and a recovery of oil prices, gave the loonie a lift.

Alfonso Esparza

Alfonso Esparza

Senior Currency Analyst at Market Pulse
Alfonso Esparza specializes in macro forex strategies for North American and major currency pairs. Upon joining OANDA in 2007, Alfonso Esparza established the MarketPulseFX blog and he has since written extensively about central banks and global economic and political trends. Alfonso has also worked as a professional currency trader focused on North America and emerging markets. He holds a finance degree from the Monterrey Institute of Technology and Higher Education (ITESM) and an MBA with a specialization on financial engineering and marketing from the University of Toronto.
Alfonso Esparza