Week ahead – Focus shifts east

Where do we stand

This week has seen the focus remain on central bank, particularly the disappointment with their ability to do what the market demands of them.

Last week it was Mario Draghi and the ECB that was seen to not be being dovish enough, this week it was the turn of Jerome Powell and the Fed to frustrate. It’s becoming increasingly clear how much investors are reliant on the central banks to maintain the positive momentum. Earnings season is going well relative to expectations but is still on course for an earnings recession.

UK politicians may be on summer recess but with less than three months to go until the UK leaves the EU, as it stands without a deal, I don’t think too many of Boris’ team will be off on their holidays. The PR offensive is likely to continue and so far, this hasn’t been favorable for the pound.

Trade talks resumed in Shanghai this week but it would appear they didn’t go to plan. Trump announced on Thursday that a 10% tariff will be slapped on $300 billion of imports from 1 September as he further ramps up the pressure on the Chinese regime to compromise on certain issues. While investors saw this as a sign that a Fed rate cut in September is more likely – almost guaranteed – that didn’t save the stock market which tumbled on the news.

The coming week sees a few major central bank meetings taking place and a scattering of data but it may be much quieter overall with traders left to seethe over the unwillingness of central banks to be the impulsive trigger happy officials we are usually happy they are not.

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Central Banks next week

The Reserve Bank of Australia (RBA) appears to be in pause mode for now after delivering 2 consecutive rate cuts. Rates are at record lows and headline inflation did tick higher in Q2. Market pricing only assigns a 6% chance of a cut at the meeting on Tuesday.

Another surprise cut cannot be ruled out but since the RBA is focusing on the unemployment rate, we have to wait until August 15 for the next data set; If it happens, Aussie could get hit.

The Reserve Bank of New Zealand (RBNZ) last cut interest rates in May and markets are pricing in more than 90% probability of another 25bps cut on Wednesday. The RBNZ was one of the first central banks to start cutting rates by 25bps in May but held off in June.

Another 25bps rate cut from the Reserve Bank of India (RBI) is now priced in, which will be the fourth since the fourth quarter of 2018. India is facing the same issue as many other central banks: slowing growth and benign inflation. The Monetary Policy Committee has dovish leanings and market pricing suggests a more than 80% chance of a cut.

Full list of central bank meetings and speakers

Monday – No meetings or speeches

Tuesday – RBA (Australia) , Patrick Harker (Fed – Non-voter), James Bullard (Fed – voter)

Wednesday – CBH (Hungary), RBI (India), BoT (Thailand), RBNZ (New Zealand), BoJ (Japan) Summary of opinions, Charles Evans (Fed – Voter), Adrian Orr (RBNZ Governor)

Thursday – No meetings, no speeches

Friday – CNB (Czech Republic), RBA Monetary Policy Statement, Philip Lowe (RBA Governor)

Political update

Any hopes that Johnson’s victory would release some of the pressure on the pound were quickly dashed as his team seriously stepped up the Brexit no-deal PR offensive which has sent sterling spiraling. We’re now not far from post-referendum lows as no-deal is increasingly priced in. The currency is going to remain extremely volatile and vulnerable to no-deal threats. Sterling may have already fallen far but there could still be a long way to go.

No further escalations in the Persian Gulf over the last week but tensions remain high between Iran and the US/UK and the risk of further acts of hostility are likely. So far, all sides have refrained from overstepping the mark and significantly escalating the conflict but this could happen at any time, intentionally or not.The Strait of Hormuz is a hugely important passage that carries around 20% of all daily oil production. Any escalation that jeopardizes this could cause sharp spikes in oil prices.

There were more anti-govt demonstrations in Hong Kong at the weekend. What began as an anti-extradition law protest has morphed into a more deep-seated protest against the government. Protests are becoming more violent, with China accusing the US of “meddling” in the situation. A notion that Washington has denied.

Relations between the coalition government’s populist partners in Italy appears to be on the mend reducing the risk of a collapse in the near-term. The risk of renewed infighting will never go away between the two parties in what will remain a fragile and fiery partnership.

North Korea has conducted three sets of “projectile” test launches in the last week. They have all been short-range missiles so far and are seen as posturing ahead of a planned August military exercise by South Korea and the US. Trump tweeted on Friday claiming these not to be in violation of the agreement signed in Singapore, just possibly a United Nations violation. This may escalate but Trump seems keen to not allow that to happen.

Anything else

Bitcoin and other cryptocurrencies survived the Congressional grilling on Facebook’s proposed digital currency offering.  The digital coin space has already been enduring an increased regulatory environment, but the Facebook proposed offering has caught the attention of all US government leaders.  Current laws limit the reach Congress currently has on Libra since they are not a bank.  The SEC could deem Libra a security and regulate them.  Bitcoin’s rollercoaster ride continues and it’s anyone’s guess the extremes that prices can achieve. 10%+ days are not rare and markets are open over the weekend.

The Central Bank of the Republic of Turkey (CBRT) cut interest rates by 4.25% last week, which exceeded market expectations but didn’t come as a great surprise. TRY took the decision in its stride and has since gained ground rather than lost it. The move was a clear sign that the central bank is no longer fully acting independently and is vulnerable to further interference and therefore rate cuts which may not get such a tame response. Inflation data on Monday will attract plenty of attention following the central banks moves.

Traders are reeling from the Fed’s refusal to go full dove on Wednesday which weighed on commodities in the middle of the week. Global stimulus efforts are generally supportive but markets have been left disappointed over the last couple of weeks. Oil has its eyes on other things, be it more inventory declines, the Persian Gulf, US output and global growth which was keeping it volatile but range-bound. Trump’s comments on Friday sparked commodity markets back to life, with gold back near its highs and oil tanking on the announcement. It should keep things interesting in the coming weeks.

Economic Data

Date

Time

Country

Importance

Release
5 Aug 2019 01:30 Japan High Services PMI
01:30 Hong Kong Medium IHS Markit PMI
02:45 China (Mainland) High Caixin Services PMI
06:00 India High IHS Markit Svcs PMI
08:00 Turkey Low CPI YY
08:15 Spain Medium Services PMI
08:45 Italy Medium Markit/IHS Svcs PMI
08:45 Italy Not Rated Composite PMI
08:50 France High Markit Serv PMI
08:50 France High Markit Comp PMI
08:55 Germany High Markit Services PMI
08:55 Germany High Markit Comp Final PMI
09:00 Euro Zone High Markit Serv Final PMI
09:00 Euro Zone High Markit Comp Final PMI
09:30 United Kingdom Medium Markit/CIPS Serv PMI
09:30 United Kingdom Not Rated Composite PMI
14:00 Brazil High Markit Services PMI
14:00 Brazil High Markit Composite PMI
14:45 United States High Markit Comp Final PMI
14:45 United States High Markit Svcs PMI Final
15:00 United States High ISM N-Mfg PMI
23:45 New Zealand High HLFS Unemployment Rate
6 Aug 2019 02:30 Australia High Trade Balance G&S (A$)
05:30 Australia High RBA Cash Rate
13:00 New Zealand High Milk Auctions
22:30 United States Not Rated API weekly crude stocks

7 Aug 2019

03:00 New Zealand High Cash Rate
07:00 Germany High Industrial Output MM
10:00 India High Cash Reserve Ratio
10:00 India High Repo Rate
10:00 India High Reverse Repo Rate
15:30 United States Not Rated EIA Weekly Crude Stocks
8 Aug 2019 13:30 United States High Initial Jobless Claims
China (Mainland) High Trade Balance USD
9 Aug 2019 00:50 Japan High GDP QQ
02:30 China (Mainland) High CPI YY
02:30 China (Mainland) Medium CPI MM
06:45 Switzerland Low Unemployment Rate Unadj
07:00 Norway High Consumer Price Index YY
09:30 United Kingdom High GDP Estimate YY
09:30 United Kingdom Medium Industrial Output YY
09:30 United Kingdom Medium Manufacturing Output YY
09:30 United Kingdom High GDP Prelim QQ
09:30 United Kingdom High GDP Prelim YY
13:15 Canada High House Starts, Annualized
13:30 Canada Medium Building Permits MM.
13:30 Canada Not Rated Avg hrly wages Permanent employee YY
13:30 Canada High Employment Change
13:30

Canada

High

Unemployment Rate

This article is for general information purposes only. It is not investment advice or a solution to buy or sell securities. Opinions are the authors; not necessarily that of OANDA Corporation or any of its affiliates, subsidiaries, officers or directors. Leveraged trading is high risk and not suitable for all. You could lose all of your deposited funds.

Craig Erlam

Craig Erlam

Senior Currency Analyst at OANDA
Based in London, England, Craig Erlam joined OANDA in 2015 as a Market Analyst. With more than five years' experience as a financial market analyst and trader, he focuses on both fundamental and technical analysis while conducting macroeconomic commentary. He has been published by The Financial Times, Reuters, the Wall Street Journal and The Telegraph, and he also appears regularly as a guest commentator on networks including Sky News, Bloomberg, CNBC and BBC. Craig holds a full membership to the Society of Technical Analysts and he is recognized as a Certified Financial Technician by the International Federation of Technical Analysts.