Week Ahead Central Banks to Attempt Return to Fundamentals

12 Jun 2017

UK, Switzerland, Japan and US central banks to deliver statements

The US dollar is mixed against majors in a week that saw geopolitical factors drive markets. The surprising result of the UK elections with conservatives being forced to partner to form a government has the pound depreciating across the board. Commodity currencies (AUD, CAD and NZD) appreciated versus the greenback and the majors (CHF, EUR and GBP) traded lower. The JPY ended the week flat against the dollar ahead of a busy week in central banking.

The U.S. Federal Reserve will host the Federal Open Market Committee (FOMC) meeting on June 13 and 14. It will release its monetary policy statement on Wednesday, June 14 at 2:00 pm EDT. The Fed is highly anticipated to hike rates by 25 basis points for the second time this year, to a 100–125 basis points for the Fed funds rate. The CME FedWatch tool is showing a probability of 95.8 percent of a higher rate on Thursday. Fed Chair Janet Yellen will take part in a press conference at 2:30 pm EDT to give more details on the central bank’s decision.

The Swiss National Bank (SNB) will publish the Libor policy assessment and a will kick-off a press conference on Thursday, June 15 at 3:30 am EDT. In the aftermath of the UK elections the Bank of England (BoE) is unlikely to make a drastic change. The BoE will publish its monetary policy summary and minutes of its policy meeting on Thursday at 7:00 am. The conservative party called a snap election to further solidify its majority and instead it is now forced into a partnership with Northern Ireland’s Democratic Unionist party to form a working majority. The Bank of England will have to wait until there is more clarity on Brexit before it can raise rates.

The Bank of Japan (BOJ) will round up the week on Friday, June 16 with its monetary policy statement being released at midnight and BOJ Governor Haruhiko Kuroda hosting a press conference at 2:30 am EDT.
The BOJ is in a similar position to the European Central Bank (ECB) as it could deliver an optimistic assessment on the Japanese economy, but being cautious about inflation losing traction. The market is not forecasting any change to the interest rate or stimulus program at this time.

The EUR/USD lost 0.749 percent in the last five days. The single currency is trading at 1.1193 after the ECB met expectations by keeping the interest rate and QE program unchanged. The central bank did remove the reference to rate cuts, and President Mari Draghi praised the momentum of the economy, while at the same time warning of weak inflation. The USD was able to shake off some of the impeachment cloud surrounding the Trump administration after the testimony of James Comes. There was nothing new that emerged during the proceedings as Comey stuck to his notes on his meetings with President Trump. The USD was lifted by lack of evidence, but will remain under pressure as this is only a small part of the investigation surrounding his team and unofficial contact with Russian agents.

Political risk drove the direction of the pair last week, but going forward the US will release key economic data as well as the expected rate hike from the Fed further appreciating the dollar against the euro. The Trump administration continues to pledge a tax reform and infrastructure spending policies but until they materialize the June rate hike might be the last one for the US central bank in 2017.

The French parlimentary elections are not expected to bring as many fireworks as the UK elections but are nevertheless important as the results will define the type of government Emmanuel Macron gets to lead. The first round of elections will take place on June 11, with a second round if needed on the 18. Macron is expected to gain a majority with his newly formed party thanks to new rules put in place in 2014 that forbids representatives to hold two offices (local and federal) at the same time with the vast majority chasing to retain their local positions and not run again on this parliamentary elections. If Macron party gets a majority it would spell the end of the two party system in France.

Oil lost 3.612 percent in the last week. The price of West Texas Intermediate is trading at $45.71 after the massive buildup on Wednesday on the US weekly crude inventories. The forecast had called for another drawdown and instead the shock rise in inventories in the same week as the rift between Qatar and major Arab states put downward pressure on crude prices. The Organization of the Petroleum Exporting Countries (OPEC) has stabilized prices since they announced their production agreement with major producers last year that was put into effect in January. Nearing the end of the original six month duration members have agreed to a 9 month extension. Their goal of price stability has been met, but a glut in energy products remains as producers not part of the deal like the United States, Canada and Brazil have increased production. The US in particular has gone from a net importer of crude to an exporter offsetting the efforts from OPEC.

Weekly inventories are released every Wednesday at 10:30 am EDT. Last week there was a buildup of 3.3 million barrels when a drawdown of 3.1 million was expected. Oil disruptions have been the only factor that have driven oil prices higher, but due to the nature of the disruptions they are not consistent. Case in point the current Nigerian pipeline leaks. Nigeria and Libya due to disruptions are exempt form the production cut, but as soon as those go away the OPEC will face further internal pressure as the oil glut will continue due to stagnant demand for energy around the globe.

The GBP/USD lost 1.212 percent in the last five days. The shocking results of the UK election caused anxiety as the solid majority achieved in 2015 (itself a shock at the time) was wasted by a poor campaign that made the decision of a snap election questionable and could end the career of Theresa May. The election was supposed to put the Conservative party in better footing to deal with the EU in Brexit negotiations. Now needed a partner for majority the Conservative party will be more fractured as it misjudged the intentions of the British people once again. In a curious development it is the less likely probability of a hard brexit (that would have been pushed with a solid Conservative win) that is keeping the GBP from falling further. The Tories will be now forced to seek a more compromised soft Brexit but the EU is now more than ever in the driver seat.

Up ahead the Bank of England (BoE) will be tasked with riding out the political uncertainty of a Brexit outcome that is a moving target. The central bank is not expected to make any major interventions like it did when the Brexit referendum results were announced.

Market events to watch this week:
Tuesday, June 13
4:30 am GBP CPI y/y
8:30 am USD PPI m/m
10:00 pm CNY Industrial Production y/y
Wednesday, June 14
4:30 am GBP Average Earnings Index 3m/y
8:30 am USD CPI m/m
8:30 am USD Core CPI m/m
8:30 am USD Core Retail Sales m/m
8:30 am USD Retail Sales m/m
10:30 am USD Crude Oil Inventories
2:00 pm USD FOMC Economic Projections
2:00 pm USD FOMC Statement
2:00 pm USD Federal Funds Rate
2:30 pm USD FOMC Press Conference
6:45 pm NZD GDP q/q
9:30 pm AUD Employment Change
Thursday, June 15
3:30 am CHF Libor Rate
3:30 am CHF SNB Monetary Policy Assessment
3:30 am CHF SNB Press Conference
4:30 am GBP Retail Sales m/m
7:00 am GBP MPC Official Bank Rate Votes
GBP Monetary Policy Summary
GBP Official Bank Rate
8:30 am USD Unemployment Claims
Tentative JPY Monetary Policy Statement
Friday, June 16
Tentative JPY BOJ Policy Rate
2:30 am JPY BOJ Press Conference
8:30 am CAD Core Retail Sales m/m
8:30 am USD Building Permits

*All times EDT

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