The equity rally during the latter half of last week which could be characterized as hope from participants the G20 meeting in Shanghai over the weekend would yield a ground-breaking accord outlining coordinated policy action to stimulate the global economy may be at risk of falling flat over the coming week, as the communique from policymakers stuck to reiterating past comments and concerns for the global economy. The statement at the conclusion of the G20 opined that economies needed to look beyond monetary policy as an elixir to growth, and that by itself, monetary policy stimulus would not achieve balanced growth. While monetary policy will continue to support economic activity, the communique suggested that monetary policy would be unable to shake the global economy out of its uneven recovery, and that structural reforms combined with fiscal policy should be used to spark economic activity. There was much talk about foreign exchange, with the G20 members agreeing to inform each other in advance about policy decisions that could lead to devaluations of their currencies, which is likely a result of Beijing’s decision to devalue the yuan last August. Both the head of the People’s Bank of China along with Premier Li told the group that there was little appetite from Chinese policy makers to competitively devalue the yuan in a bid to boost exports, though they did highlight that monetary policy would have to be kept appropriately loose in order to continue their focus on structural reforms. Speaking of competitive devaluations, Bank of Japan Governor Kuroda conveyed the members of the G20 were on board with the BoJ’s recent decision to take the plunge into negative interest rate territory as a way to boost the disinflationary woes that plague the Japanese economy, and by no means was this a way by which to devalue the yen further. All in all, the communique from the group was rather tepid and likely will be somewhat of a disappointment for those hoping more promises of coordinated action similar to 1985’s Plaza Accord, which may hamper global risk appetite as the new trading week gets underway.
Looking to the week ahead, the euro will be in focus leading up to the next European Central Bank meeting set to take place on March 10th, with market participants trying to decipher how the incoming data will sway the ECB. The argument for further monetary policy accommodation has come from a lack of positive developments regarding consumer prices, which last week were reinforced by uninspiring flash inflation data out of both Spain and Germany for the month of February. In addition, the disappointing flash PMI readings for the month of February illustrate poor purchasing activity and contribute to the apathetic economic outlook, increasing speculation Mario Draghi and Co. may use this opportunity to tweak monetary policy in an effort to both stimulate domestic demand along with boosting the inflation outlook. Adding fuel to the fire, today’s flash CPI reading for the common currency bloc came in softer than expected from the tepid prints in both Spain and Germany, with the headline reading falling by 0.2% in February on a year over year basis, while the core print slid from 1.0% to 0.7%. The euro is off modestly against the big dollar this morning, weighed down by building data that leans towards further accommodative monetary policy from the ECB at their next meeting.
Canada will report GDP growth for fourth quarter on Tuesday , and while expectations are for December to show a 0.1% increase, the quarterly reading will likely post a flat reading. Also worth noting, consumer spending, which has been an integral component to GDP growth for the Canadian economy, slumped in December with retail sales falling 2.2% on a month over month basis, so there is the potential for downside risk within Canada’s GDP numbers that are set to be released on Tuesday. The backing up of interest rates as a response to a wider than expected budget deficit from the Federal Government appears premature in our opinion, especially as the country continues to deal with the negative terms of trade shock from lingering low commodity prices and the resulting implications on consumer spending. While Poloz had previously signaled the central bank was likely on hold until the new government budget would be unveiled, we feel the tightening of financial conditions highlight a greater risk for policy action ahead of the budget than markets are currently anticipating. Effectively, market expectations are only pricing in a 14% chance that Poloz reduces the overnight lending rate from 0.50% to 0.25%, but given that Poloz has been known to surprise participants by effectively taking out “insurance” in the form of lowering interest rates, we would place the probability slightly higher than what participants are currently anticipating.
Employment data out of the US will be released on Friday of this week, and given weekly jobless claims have been trending lower, it will be likely slack in the labour market continues to be absorbed. Expectations are to see hiring pick up in February, and should earnings growth remain firm, are likely to reinforce the positive developments in core inflation which would support policymakers in their bid for a gradual normalization of monetary policy. Last week’s strong durable goods report, along with positive developments in the PCE index have bolstered the greenback, and if another robust employment report hits the wires on Friday, participants will likely be upping their bets on a further normalization of monetary policy by the second quarter. While the domestic economy is looking to re-accelerate in the first quarter of 2016, the risk to a further grind higher in the DXY could potentially be the results of this week’s SuperTuesday. While it is likely Clinton emerges from Super Tuesday as the front runner to secure the Democratic nomination, the likelihood that Trump gets the Republican nomination could ratchet higher after Super Tuesday, and as such, may pose a headwind for the American buck. It doesn’t appear participants have responded to the increasing uncertainty around the Republican frontrunner, and as such, may weigh on the big dollar should the chances of Trump securing the Republican nomination increase.
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