The Week Ahead updated February 13, 2009
• US set to pass fiscal stimulus package
• Brutal range environment prevails
• G7 unlikely to save the world, but may see JPY weaken
• Key data and events to watch next week
US set to pass fiscal stimulus package
At this writing, the US House of Representatives has passed the $787 billion economic stimulus package, and the Senate is set to vote later this evening, with passage expected there too. So it looks like the US will have the much ballyhooed and maligned stimulus package and the question is now what? The most likely answer, I think, is not much. It will be months until the stimulus money finds its way into the economy and months until it has any effect on economic data, so we are left with sentiment as the primary driver. Given most economists' views that the package will at best cushion the US downturn, a relapse in sentiment is as likely as any rally. In the meantime, the global recession continues to weigh on the near term outlook for risk assets, generally lending the USD support. The offset to this will be concerns over the US ability to borrow the expected $2.0-2.5 trillion it needs this year to fund the TARP, the stimulus package, and normal operating deficits.
The most promising near-term prospect is a plan from the Obama administration, expected to be announced next week, to limit foreclosures on troubled US homeowners. While details are not fully settled yet, such an effort may in relatively short order begin to stem the tide of rising foreclosures, which have been adding to home price declines, which keeps prospective home buyers on the sidelines. A housing market rebound is still likely a year off, but the first step in the recovery process is for the deterioration to stop. Market sentiment rebounded sharply after the plan was announced late Thursday afternoon, and this was most evident in the sharp rebound in US shares.--Brian Dolan
Brutal range environment prevails
Major FX pairs have been locked in a brutal range over the last several weeks, buffeted by wavering market sentiment as economic reality--the global recession--offsets government efforts to stabilize the outlook. JPY-crosses continue to be the clearest barometer of market sentiment, with pairs like EUR/JPY and GBP/JPY rising when sentiment improves and collapsing when despair returns. The time lag of US and other government stimulus spending plans suggests little reason to expect any material change in economic data over the next two months. As such, sentiment will remain the main driver of markets in the near term. In terms of the range boundaries, I'm watching the following levels for potential daily closing breakouts: EUR/USD 1.2700-1.3100; USD/JPY 89.50-92.50; GBP/USD 1.4000-1.5000; USD/CHF 1.1500-1.1800; USD/CAD 1.2000-1.2500; AUD/USD 0.6300-0.6850; and NZD/USD 0.5000-0.5500. In the main crosses, I'm focused on: EUR/JPY 114.00-120.00; EUR/GBP 0.8650-0.9100; and EUR/CHF 1.4800-1.5200. --Brian Dolan
G7 unlikely to save the world, but may see JPY weaken
The G7 is meeting in Rome at this moment, and all indications are that currencies will receive only the standard treatment. The draft statement available on Friday afternoon indicated the G7 would say we must avoid disorderly movements in currencies; we will continue to monitor currencies closely; we must avoid excess volatility in currencies. To the extent they have not singled out any particular currency for mention, the market response may be muted. But the language implies a desire to see those currencies that have experienced the greatest volatility in recent months to reverse course. The standouts in this regard are GBP weakness and JPY strength, with overall USD strength potentially a target, too.
For the JPY in particular, this past week saw significant institutional flows selling the JPY in the run-up to the G7, with reported semi-official buying of USD/JPY just below 90.00. I think there is potential for a larger sell-off in JPY (rally in USD/JPY) in the weeks ahead, both from the G7's implicit warning and the likely ebbing of Japanese corporate hedging (an end to JPY buying) as Japan's financial year end approaches at the end of March. Japan will release 4Q GDP on Monday morning in Tokyo, and the forecast is not good: -11.6% on an annualized basis, providing a nice fundamental excuse to dump JPY. Technically, USD/JPY is currently trading inside the daily Ichimoku cloud (base at 91.32 to start next week; top at 93.85 early next week) and above the Tenkan line in the weekly Ichimoku charts, leaving a favorable set-up for an advance. 92.50 is the clear break out level to start things off, with stop loss buying orders in evidence on Friday between 92.20/50. A daily close above the top of the cloud opens up potential for a more significant move toward 98/100, with the 94.30/95.00 offering some resistance on the way.--Brian Dolan
Key data and events to watch next week
The US data calendar is relatively busy in the week ahead and kicks off with the NY Empire manufacturing index, international capital flows and the homebuilder sentiment index on Tuesday. Wednesday has import prices, housing starts and industrial production on tap. On Thursday we'll see producer prices, initial jobless claims, leading economic indicators and the Philadelphia Fed manufacturing index. Friday rounds out the week with consumer prices. There are also a number of Fed officials speaking next week and the highlight looks to be Fed Chairman Bernanke who will speak on the Fed liquidity programs on Wednesday. Look for the minutes of the Jan 28 FOMC meeting on Wednesday as well.
The Eurozone calendar is also pretty busy next week. Tuesday has the Eurozone trade balance along with the Eurozone and German ZEW surveys due up. Eurozone construction data is the highlight on Wednesday and Friday is the busiest day of the week with French consumer prices, French business confidence and the PMI manufacturing and services surveys for the Eurozone. Look out for a speech by ECB President Trichet on Monday as well.
It is pretty light in the UK and home prices lead the way for data on Monday. Tuesday follows with consumer and retail prices while Wednesday has the all important Bank of England meeting minutes on tap. Public sector borrowing is up on Thursday and retail sales close out the week on Friday.
Japan sees a busier week than usual. GDP kicks of the week on Sunday and is followed by industrial production and the tertiary industry index on Monday. Wednesday has the leading and coincident economic indicators on deck. The Bank of Japan will make its rate decision on Thursday (expected to remain steady) and we'll also see nationwide department store sales that day. Look for the BOJ monthly report on Friday.
Canada is once again jam packed with top-tier indicators. On Monday we have manufacturing shipments and international security transactions due up. Wednesday has wholesale sales data scheduled while on Thursday we get leading indicators and the Bank of Canada review. Consumer prices close out the action on Friday.
It is a light week down under and it starts with New Zealand performance of services index and New Zealand producer prices on Sunday. Tuesday has the Australian leading index while Wednesday sees Australian retail sales. Last but not least, look for Australian new motor vehicle sales on Friday.