Political developments were plentiful over the weekend, offers were made on both sides of the aisle regarding the partial government shutdown, the second Trump/Kim summit is expected in February and EU officials are unsure how long Brexit should be extended, if and when PM May asks. The start of the week will focus on Chinese GDP, May’s plan B and the likely rejection from the EU, then it will shift to central bank rate decisions, no major surprises are expected from the BOJ and ECB, major European PMI data will be closely watched and comments will be ample from various leaders from the World Economic Forum in Davos.
The drivers for the recent rally with the US dollar have been a strong start to earning season in the US, robust employment data, and accommodative monetary policies globally trying to ease the worldwide economic weakness. Political and trade stories will play a big part this week in demand for safe-haven assets. The partial government shutdown is now in its 30th day and over the weekend we saw President Trump offer an immigration compromise to end the shutdown, but that was swiftly rejected by Democrats. The Democrats countered with a permanent solution for the so-called “Dreamers”, the President’s offer provided a 3-year solution. Both sides are still far away in demands, but optimism could grow as we are finally seeing offers being made. Almost a year ago, when Trump had Republicans leading both the House and Senate, he ended talks that would have secured $25 billion over 10 years on the border funding after the Democrats pursued a permanent solution for Deferred Action for Childhood Arrivals (DACA). The pain for the 800,000 furloughed workers is growing and while there is no real reason to be optimistic, the President may need to blink first so his administration can move forward on other objectives such as an infrastructure deal, trade deals, and the denuclearization of North Korea.
The Australian dollar will take a queue from data from its biggest trading partner, China’s release of GDP, retail sales and Industrial production. Slowdown concerns have kept the Aussie grounded and the next round of data is expected to continue to show weakness in the Chinese economy. The Chinese fourth quarter GDP reading is expected to shrink from 6.5% to 6.4% and Industrial Production to fall from 5.4% to 5.3%. The effects from the Chinese RRR cuts will not kick in until the January readings. Some analysts are targeting China’s GDP to fall below 6% by 2020, but in the short-term if we see prints closer to 6.0%, that could be very painful for the Australian dollar.
The first Trump/Kim summit was in Singapore in June and the leaders could be planning a February summit in Vietnam. On Friday, President Trump met with North Korean top aide Kim Yong Chol. The talks appear to be positive and circled around denuclearization and a second meeting. Sanctions have been in place for North Korea since 2006, with 90% of their exports being banned. The North Korean economy has slowed down since 2016 and the North Korean leader may be in a position where he may be finally considering offering a path to denuclearization.
Each day that passes for Theresa May , the pressure builds on finding a solution that will avoid a disorderly exit. The Prime Minister is hurrying to create a Plan B option for the Monday night deadline. Immediately after surviving the no-confidence vote in Parliament, she offered to have cross party talks with Labour. Labour Leader Corbyn demanded she take the no-deal option off the table, but the PM has consistently refuted doing that. May appears to have abandoned cross party talks and seeks to find changes on the Irish backstop, a difficult task to do with pro-Brexit members and she should not rule out that the European Union will put up great resistance. May continues to avoid talks about extending Article 50, but that may be her best option. The British pound appears to be capped at 1.30 and will need some positive developments in order to take out that level.
The Bank of Japan (BOJ) will have a rate decision on Tuesday and the markets will closely watch to see if they cut their inflation and growth forecasts.
The ECB will also have a rate decision on Thursday and no changes are expected with their key rate. Many will look to see if they delay the timing of their first rate increase. Interest rate probabilities show the ECB could raise rates at the December meeting. The ECB has been clear in signalling rates would rise after the summer, but we could see a slight delay.
Oil prices soared after optimism grew regarding trade talks amongst the US and China. The positive developments in OPEC + upholding their production cuts and encouraging trade talks is giving oil its best start since 2001, up over 17.8%. The problem for oil will be when the market focuses on the supply side again. Despite the belief the global economy will improve and once we are beyond Brexit and trade wars, the US will eventually deliver more exports of oil than it imports. The US shale industry is hear to stay and while oil is enjoying a bullish run here, the supply side concerns could eventually cap this rally.
Gold prices continue to respect the $1,300 level and could see further weakness if we continue to see good headlines regarding trade talks and if earning season continues to drive risk appetite.
Monday, January 21
CNY China GDP
GBP PM May Plan B due
2:00am EUR German PPI
US Holiday; Observance for MLK Day
Tuesday, January 22
JPY BOJ Policy Rate
4:30am GBP UK Average Earnings & Claimant Count Rate
5:00am EUR German ZEW Survey Current Situation
10:00am USD Existing Home Sales
4:45pm NZD CPI reading
Wednesday, January 23
World Economic Forum (4-day event)
8:30am CAD Retail Sales
10:00am EUR Euro Zone Consumer Confidence
10:00am USD Richmond Manufacturing Index
Thursday, January 24
EUR Major European Manufacturing & Services PMI readings
7:45am EUR ECB Rate Decision
9:45am USD Flash Manufacturing & Services PMI Readings
11:00am Crude Oil Inventories
Friday, January 25
4:00am EUR German Ifo Business Climate
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