politics-affect-markets-this-week

How Politics Can Influence Forex Markets This Week

Last week saw the impact that Politics can have on Forex Markets. The Pound whipsawed with various Brexit developments. 

Risk sentiment remained another key driver as well. This week focus should be on politics and intermarket asset classes. 

In this article we’ll go through important events that happened last week. We will also discuss events to look out for in the week ahead along with some trade ideas.  

Below are the countries we will discuss in this week’s article:  

United States Dollar
Canadian Dollar
Great British Pound
Australian Dollar
New Zealand Dollar
Euro
Japanese Yen
Swiss Franc

 United States Dollar

What Happened Last Week 

The Dollar started the week off firm. The DXY reached its highest levels since June 2017. 

From Tuesday the DXY started to pull back from the highs. A possible cause could have been a steady pullback in US 10-year yields. 

On Wednesday we saw October CPI numbers for the US. The release came out in line with expectations. 

CPI YY came in as expected at 2.5%. Core CPI YY had softened to 2.1% from 2.2%. 

Headline CPI MM was in line with consensus at 0.3%. Core CPI MM was also in line with forecasts at 0.2%. 

Nothing in the CPI numbers changed the Fundamental picture of the USD. According to ING, the release further cements a December rate hike by the FED. 

They also noted that the drop in oil prices should cause a drop in November headline CPI. 

On Thursday we also had Retail Sales data for October. 

Retails Sales MM came in higher at 0.8% versus expectations of 0.5%. Retails Sales YoY came in lower at 4.57% versus forecasts of 4.72%. 

BNZ notes that although headline numbers were higher there were downward revisions. They add that Retail Control and Retail Sales YoY feed into GDP numbers. 

This means the downward revisions on these numbers could pose a hick up for GDP. 

On Friday the Dollar sold off across the board. This came as comments from Fed’s Clarida brought doubts about the FED’s hike path. 

Clarida said the FED is close to the neutral rate. He also said the slowdown in global growth should be a concern for the FED. 

In another interview Fed’s Kaplan also added to the pressure. He explained that slowing growth in EU and China could affect the US economy. 

The Week Ahead 

The USD has a light economic calendar this week. 

On Tuesday 20 November we have Housing Starts. Lately the US housing markets has showing some cracks. 

Housing starts are still at decade highs but has slowed in 2018. Wells Fargo explains that higher interest rates is probably the cause. 

The market expects Housing Starts to climb to 1.225M from 1.201M. 

On Wednesday 21 November we have Core Durable Goods Orders. Durable goods were boosted in September by higher defense aircraft orders. 

This means the October numbers should have a rebound. Markets are expecting Durable goods to slow to -2.5% from 0.7%. 

On Friday 23 November we also have the November Markit flash PMI’s. According to IHS, both PMI’s were distorted recently due to weather. 

Both Manufacturing and Services PMI’s showed a rebound in growth in October. This might have been due to a rebound after weather related weakness. 

November’s Markit PMI’s will give clues about the underlying growth momentum in the US. 

Trade Ideas 

The USD was pressured on Friday after comments by FED members. It will be important to see whether this move continues this week. 

Any potential misses on economic data can provide short term trades. Look to pair any economic releases with the current USD sentiment. 

If the DXY remains pressured look to trade misses on economic data. If the DXY resumes its bullish trend look to trade beats on economic data. 

Keep in mind the Fundamental picture for the USD is still bullish. This means any trades taken on data misses should be short term.  

 Canadian Dollar 

What Happened Last Week 

Due to a lack of tier one data the CAD was driven by oil prices last week. Oil prices has fallen 27% from the start of October. 

Oil had a quick 4% drop on Tuesday alone. This was due to OPEC revising down global oil demand forecast for 2019. 

 As a major oil producer the Canadian economy is dependent on oil. Big fluctuations in oil prices can affect the CAD. 

In this chart we can see how correlated the CADUSD pair has been with oil prices. 

The spread between US and Canadian crude prices is also a challenge for the CAD. With Western Canadian Select falling as low as $13.46 a barrel. 

This was the lowest price for WCS from 2008. On Friday the Canadian Finance Minister voiced concern over Canadian Crude prices. 

A big reason for the fall in WCS is that Canada’s export pipelines lack capacity. There is enough oil, but exporters can’t get it to the markets. 

The CAD is a tricky currency to trade right now. This is due to opposing forces. 

On the one hand we have falling oil and commodity prices. Which is negative for the CAD. 

We also have a hawkish central bank and healthy economy. Which is positive for the CAD. 

This has made the CAD a tricky currency to trade lately. 

The Week Ahead 

We have a busy economic calendar for the CAD this week. 

On Tuesday 20 November we have OPEC-JMMC Meetings. There has been talk of potential output cuts. 

Any announcements of output cuts can cause a relief rally in Oil. Especially after the recent big drops. 

There was also reports that Saudi Arabia is decreasing oil shipments to the US. Any developments on this could move the oil markets. 

We also have a speech by deputy governor Wilkins on Tuesday and Thursday. Followed by a speech by deputy governor Lane on Wednesday 21 November. 

Central bank members often give forward guidance clues during speeches. We’re not expecting fireworks, but you never know what they might say. 

On Friday 23 November we have CPI and Retail Sales numbers for October. 

Headline CPI YY had a significant drop in September to 2.2% from 2.8%. Wells Fargo notes the drop was due to one-off factors. 

They also said recent drops in oil prices should keep headline CPI lower. 

The BOC’s preferred CPI readings are the CPI Trim, CPI Median and CPI Common.  

They also inched lower in September. All three are still on or close to the BOC’s 2% inflation target. 

The BOC expects CPI to remain close to 2% from now to 2020. We also know the BOC is very data dependent. 

Any big changes in CPI will be important considerations for the BOC. Especially in terms of their projected rate path. 

Retails Sales MM are expected to come in at 0.0% from -0.1%. This release can be very volatile from month to month. 

Trade Ideas 

Oil prices and risk sentiment should continue to drive the Pound this week. 

Keep the news squawk on for any OPEC announcements. Any OPEC news that affects oil prices should affect the CAD. 

The BOC is on a hiking path right now. Economic data has been overall positive as well. 

The best trade would be a relief in oil and equities coupled with a beat in CPI data on Friday. 

If CPI is another big miss, make sure to trade it in line with oil prices and risk sentiment. A miss on CPI would be short lived if oil prices finds some relief. 

 Great British Pound 

What Happened Last Week 

The whipsaw moves in the Pound continued last week. 

On Monday chief negotiator Barnier said a treaty text were almost ready to present to the UK cabinet. This sent the Pound higher. 

Shortly after this Barnier’s comments were played down by the UK. 

On Tuesday reports said the EU and UK had agreed to a Brexit withdrawal treaty text. The focus then turned to the UK cabinet who needed to accept or reject the proposed deal. 

We also had the latest UK jobs report on Tuesday. The jobs report was a little mixed. 

Employment rose 23K jobs versus expectations of 21K. Average Earnings YY rose to 3.2% versus forecasts of 3.1%.  

Earnings hit the highest levels since the end of 2008. 

Unemployment

The Unemployment rate ticked up to 4.1% versus consensus of 4.0%. Claimant Count increased to 20.2K from 18.5K. 

ING notes that the amount of people claiming unemployment has risen from May 2018. With Brexit as the focus the numbers didn’t move the Pound. 

The volatility hit overdrive on Wednesday. Mainly due to conflicting reports about cabinet approvals and rejections of the deal. 

Pound soared on news the PM would address the public after the cabinet meeting. Which led some to believe cabinet had agreed on the deal. 

After this the Pound fell again as reports stated PM May will only make a short statement. 

Wednesday also had the October CPI numbers. Most of the numbers came in soft. 

CPI YY slowed to 2.4% versus expectations of 2.5%. While Core CPI YY dropped to 1.9% versus forecasts of 2.0%. 

With the softer release UK CPI is inching further away from the 2% inflation target. None of that mattered as all eyes were on Brexit. 

The big news hit the wires on Thursday. Key cabinet ministers handed in their resignations over PM May’s proposed deal. 

One of the key resignations was Brexit Secretary Dominic Raab. The Pound plummeted as various ministers announced their resignations. 

Further downside was seen as the possibility of a leadership challenge increased. 

On Thursday we also had October Retail Sales data. 

Retail Sales YY fell to 2.2% versus expectations of 3.0%. Retail Sales MM contracted to -0.5% versus a forecast of 0.2%. 

A miss on Retail Sales added fuel to the Brexit fire. 

The Week Ahead 

The Pound has a light economic calendar this week. 

On Tuesday 20 November we will have the latest Inflation Report Hearings. It will be important to keep track of this for any possible policy comments from BOE members. 

The biggest focus of the Pound will be Brexit this week. Especially after the recent developments last week. 

Theresa May is under pressure and may face a leadership challenge very soon. If 48 Conservative MPs declare no confidence it will trigger a vote of no-confidence. 

If PM May survives as PM, she still needs to get her deal through parliament. 

Trade Ideas 

The Pound has been driven by Brexit developments. This should remain the case for some time to come. 

Brexit sentiment seems to be changing daily. Last week being a good example of this. 

We expect a possible leadership challenge to be a main focus. If a no-confidence vote is triggered it should be Pound negative. 

Keep the news squawk on to try and take advantage of further developments. 

Be careful with the Pound this week. If you decide to trade the Pound remember to minimize risk. 

 Australian Dollar 

What Happened Last Week 

The Aussie Dollar had a good run last week. This followed a good run the week before that as well. 

One of the contributing factors has been positive trade war rhetoric. Both from the US and from China. 

On Tuesday we saw wage inflation numbers for Q3. Both YY and QQ numbers came out as expected. 

Wage Price Index YY were flat at 2.3%. The quarterly was flat at 0.6%. This was not really a market mover. 

On Thursday we also had the October jobs report. 

Employment had a big beat of 32.8K versus expectations of 20.0K. Majority of the gains were in full-time jobs. 

The unemployment rate also stayed at 5.0% versus forecasts of a climb to 5.1%. Overall it was a positive jobs report. 

The Aussie Dollar remained supported throughout Thursday. 

The Week Ahead 

The Aussie Dollar has a very light economic calendar this week. 

On Tuesday we will see the Monetary Policy Meeting Minutes. The minutes will be scoured for any hints to future monetary policy. 

At their previous meeting the RBA revised their growth and inflation forecasts upwards. It will be interesting to see further expanding on the reasons for the revisions. 

The minutes are not expected to be market moving.  

Westpac notes that with a quiet calendar AUD will be driven by offshore events this week. Of note will be further developments with the US-China trade negotiations. 

President Trump and Xi are expected to meet on 30 November. It seems like the US is more open to compromise this time. 

Equities will also be important for the AUD in the week ahead.  

From the start of October US Equities has been showing some cracks. Asian and European equities have shown sharp declines in 2018. 

If US Equities continue to fall it could open up a lot of risk in the markets. 

Trade Ideas 

The Aussie Dollar is considered as a proxy for risk. This means it’s very sensitive to risk sentiment in the market. 

The AUD normally appreciates with risk-on tones and depreciates with risk-off sentiment.  

Keep a close eye on Equity markets. Any big moves are likely to impact the AUD. 

Make sure the news squawk is turned on this week. Keep track of further US-China trade war developments. 

 New Zealand Dollar 

What Happened Last Week 

The Kiwi Dollar had another good week. It even held up against risk-off tones at the start of the week. 

A possible reason for NZD strength was further unwinding of NZD short positions. In our previous articles we highlighted the extreme short positioning on the NZD. 

In the last two months New Zealand data revealed beats on quarterly GDP, CPI and employment. This caused markets to recalibrate their interest rate outlook. 

At their August meeting the RBNZ was contemplating a possible OCR cut down the road. This was part of the reason the markets were so short on the NZD. 

With the recent economic data, the markets are recalibrating their RBNZ rate expectations. 

The Week Ahead 

The NZD has another light economic calendar this week. 

In terms of data the only real significant release will be Dairy Prices on Tuesday 20 November. 

Over 40% of New Zealand’s exports come from Dairy Products. This means fluctuations in Dairy prices can affect the NZD. 

Dairy prices have been on a decline throughout 2018. 

The impact of Dairy prices on the NZD is not as big as it used to be. We don’t expect this to be market moving but keep an eye on it all the same. 

Trade Ideas 

With a light calendar we expect risk changes to be a main driver for the NZD. 

The Kiwi Dollar is considered as a commodity currency. This makes it sensitive to changes in risk sentiment.  

This means Equities will be an important asset class to keep track of. 

If Equities continue their recent correction it should pressure the NZD. A rally in Equities should be supportive for the Kiwi Dollar. 

We might also see further unwinding of record NZD short positioning. Recent data and RBNZ comments are supporting the NZD. 

 Euro

What Happened Last Week 

The Euro remained pressured this week. Growth concerns continue to be a big hurdle for the EU. 

On Tuesday we had the release of German Zew numbers.  

Economic Sentiment was slightly better at -24.1 versus forecasts of -25.0. Current Conditions had a big drop to 58.2 versus expectations of 65.0. 

On Wednesday we also had a first look at German Q3 growth numbers. 

German GDP QQ contracted to -0.2% versus consensus of -0.1%. GDP YY softened to 1.1% versus forecasts of 1.3%. 

ING notes that some of the contraction in GDP can be explained. They said automotive production problems and higher energy costs kept growth low. 

They explained a point for concern was poor export performance. Despite a weaker euro. 

On Friday Mario Draghi had a speech Frankfurt European Banking Congress. He once again acknowledged the recent loss in EU growth momentum. 

Despite this he remains positive about the growth and inflation outlook. Growth will be a key focus for us going forward. 

The Week Ahead 

Growth and politics will be a key focus for the Euro this week. 

On Wednesday 21 Nov the EU is expected to give their final verdict on Italy’s budget. Italy stuck to their guns and only made marginal changes to their budget. 

Danske bank expects the EU to start an Excessive Deficit Procedure against Italy. This can cause further pressure on Italian bond markets. 

On Thursday 22 November we also receive the latest ECB minutes.  

During the press conference Draghi acknowledged that EU growth has slowed. He remained positive saying it’s merely weaker momentum and not a downturn.  

Look for further info on the ECB growth and inflation outlook in the minutes. 

On Friday 23 November we will have the latest EU Flash PMI’s. Given the recent focus on growth these number will be important. 

Manufacturing and Services PMI’s slowed in October to lowest levels since 2016. 

It will be important to see whether there is a rebound in PMI or further decline. 

The market expects Manufacturing PMI to slow to 51.9 from 52.0. Services PMI is forecasted to fall to 53.5 from 53.7. 

Trade Ideas 

Our short to medium term bias remains bearish on the Euro. 

Any further decline in growth will be increasingly negative for the Euro. As growth declines the prospects of rate normalization diminishes. 

Look out for any further information about growth in the ECB minutes. 

Also keep track of Italian bond yields with the ongoing Italian budget concerns. 

One thing to keep in mind with Euro trades is the USD. The Euro has a 57.6% weight in the Dollar Index. 

Any significant moves in the DXY normally impacts the Euro. Keep an eye on Dollar moves this week following Friday’s sell-off. 

If the Dollar remains pressured, it will be supportive of the Euro. 

 Japanese Yen 

What Happened Last Week 

The JPY started the week with big gains on Monday. This was due to an overall risk-off tone due to equities. 

With the US and Canada on bank holidays on Monday liquidity was thin. This probably exacerbated the currency moves on Monday. 

Last week we had GDP numbers for Japan for Q3. 

GDP QQ contracted to -0.3% from 0.7% as expected. The Annualized GDP came in soft at -1.2% versus forecasts of -1.0%. 

Danske bank noted that the slowdown was due to recent natural disasters. 

The Week Ahead 

The JPY has a light economic calendar this week. 

On Monday 19 November we will have trade data for October. 

Exports has fallen substantially in 2018 due to the US-China trade war. 

According to IHS, it will be interesting to see whether this downtrend continues. Markets are expecting Exports YY to rebound to 9.0% from -1.2%. 

On Thursday 22 November we have National Core CPI numbers. 

Low inflation remains a big concern for the BOJ. Inflation has moved higher recently but is still far away from the 2% inflation target. 

Markets are expecting Core CPI to remain flat at 1.0% in October. 

Trade Ideas 

Data releases is important for Japan but not always very market moving. 

The JPY’s appeal as a safe-haven is normally the biggest driver for the Yen. 

We expect risk sentiment to dictate price action in the JPY this week. Keep a close eye on global equities and bonds. 

A negative risk tone should support the JPY. While risk-on sentiment should put pressure on the Yen. 

 Swiss Franc 

What Happened Last Week 

Risk sentiment dictated most of the moves in the CHF last week. 

We’ve highlighted in previous articles that moves in the CHF has been choppy recently. 

The currency has not moved with risk tones as one would expect from a safe-haven. 

The Week Ahead 

The CHF has a very light economic calendar again this week. 

Politics should be a key driver for the Swiss Franc. Italian budget concerns and Brexit developments should be watched. 

If risk tones turn negative it should be supportive for the CHF. If risk-on sentiment dominates it should pressure the Swiss Franc. 

Trade Ideas 

It has been tricky to pin point the reasons for moves in the CHF recently. 

The traditional safe-haven correlation has not played out as one would expect. 

Our bias for the Swiss Franc would be in line with risk sentiment. 

Without any clear catalysts we do not see any trade opportunity for the CHF right now.  

Wrap Up 

It is a relatively quiet week in terms of economic data releases. 

The most important data would be US Durable goods, CAD CPI and EU PMI’s. 

We expect politics to be a key driver in the markets this week. Brexit, Italian budget and OPEC developments should be in focus. 

Also keep a close eye of global equities and commodities. Big moves in either of them should impact risk sentiment. 

Good luck with your trading this week. 

Comments 

Feel free to leave any questions or comments below. 

Comments

comments

Facebook
Google+
Twitter
LinkedIn