Weekly Outlook: 2016, June 26 - July 03

Weekly Outlook: 2016, June 26 - July 03

The Brexit decision had huge market implications with a crash for the pound, falls for other risk currencies and gains for the dollar and the yen. Apart from the Brexit aftershocks, we have US and Canadian GDP data, US Consumer Confidence and other events. These are the major events on forex calendar.

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1. US GDP( final Q1): Tuesday, 12:30. U.S. economic growth was upgraded to 0.8% in the second release for Q1. Q2 looks much better but the future is uncertain with Brexit.
2. US CB Consumer Confidence: Tuesday, 14:00. Consumer confidence is expected to improve to 93.2 this time.
3. US Crude Oil Inventories: Wednesday, 14:30.
4. Canadian GDP data: Thursday, 12:30. Canadian GDP for April is forecasted to rise 0.1%.
5. US Unemployment Claims: Thursday, 12:30. The number of new claims is expected to reach 269,000 this week.
6. Chinese PMIs: Friday, 1:00 for the official one and 1:45 for the independent Caixin one. The Caixin manufacturing PMI already looks worse: a minor rise from 47.8 to 47.9 is on the cards.
7. US ISM Manufacturing PMI: Friday, 14:00. Manufacturing PMI is expected to climb to 51.6 in June.

the source

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In the meanwhile, don’t expect the market to settle down in the near-term, or really any time soon. What this means is that recent trends are likely to persist; it’s too early to catch the falling knife or attempt to be a hero. One such way to gain an edge is to monitor retail crowd positioning (analogous to commercial hedgers in the futures market), as the crowd has consistently been on the wrong side of these recent big moves. The fact that the retail crowd remains net-short EUR/USD and EUR/JPY is just another reason to maintain a high degree of skepticism towards the Euro in the near-term, beyond the understated political, economic, financial, and geopolitical implications of the historic Brexit vote.

the source

Goldman Sachs forecasts UK recession in 2017, downgrades global growth forecasts

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"First, the UK terms of trade are likely to deteriorate, especially if it becomes harder to export high-value added services (including financial services) to the European Union," the note said.

"Second, the uncertainty about the long term is likely to weigh on UK growth in the short term as firms hold off on investment...Third, outside the UK the main transmission channels are weaker UK demand for imports and—much more importantly—a tightening of financial conditions via a stronger exchange rate and lower risk asset prices."

"Further downward adjustments could become necessary if global financial markets deteriorate beyond the initial reaction, or if we see greater than expected political and economic contagion into other European countries"

the source

Brexit poses another problem for central banks struggling to combat low productivity and high debt levels on the path to growth and armed with narrow policy options. How does Brexit affect them, how might they respond and what are they likely to do?

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Bank of England
"Some believe rates could be cut as early as next week, however others think the BoE will wait."

US Federal Reserve
"The US Federal Reserve began the year expecting to raise interest rates at least four times. The bond market expects no tightening this year and as a result of Brexit has begun to price in a small chance of an easing for 2016. The US two-year note yield has fallen to about 0.60 per cent, a level seen last October, before the Fed’s first tightening of policy for the current cycle. The recent dollar appreciation “represents in itself a form of monetary tightening and consequently the need for [the] Fed to raise rates has been pushed out further."

European Central Bank
"Mr Draghi is expected to cut interest rates further, or could expand QE in value or scope. However, his calls for structural reform are difficult as governments do not have strong mandates and many eurozone countries are facing elections."

Bank of Japan
"Brexit has fuelled expectations the BoJ will ease policy at its meeting in late July. They could cut negative interest rates further or apply them more broadly, but since being introduced in January, the BoJ’s Nirp has hurt banks - share prices are down more than a third this year. Expanding the massive and complex QE programme is another option."

People’s Bank of China
"The PBoC reacted to Brexit by adjusting the renminbi fix rate on Monday by the most since 2010 - a big move which "if done in isolation would have freaked markets out. They want the market to determine the exchange rate on a managed basis because they don’t want the outflows to become acute", says Geoff Yu of UBS Asset Management."

the source