Fed hike leads busy week for central banksBy Arnaud Masset
The European Central Bank, the US Federal Reserve and the Bank of Japan are all making rate decisions this week. We expect the Fed to increase the federal funds rate by 0.25% to 2.0% and raise the interest rate on excess reserves by 20-25 basis points. The 1-week implied volatility in EUR/USD jumped to 9.95%, from 7.57% last Wednesday. The downward move in the 1-week risk reversal measure – from to 0.21% to -0.16% - shows that investors are rather buying protection against a weaker currency pair. On the contrary, both the implied volatility and risk reversal measure in USD/JPY were little changed, suggesting that the market will focus its attention on the ECB and Fed meetings. Investors will focus on Powell and Draghi speeches.
On Monday morning, the greenback eased against most of its peers as the dollar index returned to 93.42, down 0.12%. After tumbling at the 1.1854 resistance on Friday, the single currency erased Friday’s losses and tested 1.1821. Safe haven currencies lost ground as buyers stayed away, suggesting investors are worried but not too worried. There is certain nervousness out there.
Trump pounds MXN and CADBy Peter Rosenstreich
US President Donald Trump’s verbal bombardment of Canadian Premier Justin Trudeau after the weekend’s G7 summit threatens the ongoing renegotiation of the North American Free Trade Agreement (NAFTA) considerably. We would remain short on MXN and CAD, as Trump’s blasts are unlikely to promote a deal.
Meanwhile, Trump is working on an de-nuclearisation deal for North Korea, which is a pawn in US-China relations. North Korea, as a puppet of China, will signal what its master wants and will do. Failure to deliver a positive result will likely trigger a Trump backlash of tariffs against China. A positive result could see Trump deescalated his China bashing (already he has waived restrictions on ZTE, a Chinese telecommunications equipment firm). Next week the US will likely release the final list of $50 billion in Chinese import tariffs – their shape and extent will depend on how the Trump-Kim summit goes.
As widely reported, Trump blew up the G7 by disavowing the communique after it was released. In a tweet Saturday Trump referred to Trudeau as “very dishonest and weak.” Trump advisor Peter Navarro piled on the Canadian PM, telling Fox news “there is a special place in hell for any leader that engages in bad faith diplomacy with Trump.”