US

The week ahead playbook: 17 August 2020

Chris Weston
Chris Weston
Head of Research
Aug 16, 2020
Economic data is light on the ground and less impactful this week, with US fiscal negotiations taking a backseat having been pushed back, with full Congress not back in session until 8 September.

The fact that risk has held up so well despite the two parties failing to forge an agreement has likely reduced the urgency, but given the DEM’s have dropped their proposal from $3t to $2t shows we are seeing signs of convergence, and when a deal is found it should be rolled out quite quickly. That said, the delay will negatively impact economics and we’ll see if the markets play a greater role in pushing both parties to act.

It's another heavy week of political and geopolitical risk with the DEM National Convention in play and they are rolling out their big guns. UK-EU trade talks resume, so GBP could find direction from headlines here and there is the potential for US-China trade talks, which were supposed to take place on Saturday but were delayed.

Politics aside and the FOMC minutes are the tier 1 event risk for traders to focus and the wording will be dissected ahead of Jackson Hole next week and could be a vol event for markets, with traders keeping a close eye on real yields as a driver for US tech, the USD and precious metals.

For those holding an exposure in AUS200 do consider it’s a massive week for ASX200 earnings with 42% on the index market cap due to report numbers. The AUS200 is another market that is moving sideways and in need of a spark – a break of the 200-day MA would offer a bullish signal, with the buy-the-dip crowd focused on moves into 5890.

I’ve included gold into the week volatility matrix, with implied moves derived from options pricing. Good for perspective and a compliment to risk management, and position sizing, as well as levels to watch for mean reversion traders.

Event risk on the radar this week

Monday

Japan – Q2 GDP (09:50 AEST). Consensus expects -7.5% QoQ or -26.9 QoQ annualised. Like any Q2 data point that was seen now, this is highly unlikely to impact the JPY or JPN225 in any way, with USDJPY more closely aligned with risk sentiment. USDJPY bulls need a break of 107 to get excited, while a move through 106.47 takes aim at 105 and potentially even 105.88 where I’d expect buyers. I hold a small bias for downside.

US – August NY manufacturing (22:30 AEST). The index is expected to drop from 17 in July to 15 in August. A tier 2 release seemingly the highlight on an otherwise quiet night for economic data risks.

Politics – The Democratic National Convention starts in Milwaukee, with the speeches being held in a virtual setting. We won’t hear Joe Biden’s acceptance speech until Thursday (Friday morning AEST), with his speech focused on unifying America. Bernie Sanders, Michelle Obama, NY Gov Andrew Cuomo, and Amy Klobuchar get the attention on this sitting - we should hear a more detailed approach to policy through the next four days. The fact we have some many progressive speakers has been noted, so for those who want more info on this event, see here.

Tuesday

Australia – August RBA meeting minutes (11:30 AEST). Given RBA gov Lowe’s speech on Friday one suspects we will not hear anything remarkably new here that rocks the AUD dial too greatly. AUDUSD is moving sideways at present and needs a new catalyst. A bullish outside day in AUDCAD needs monitoring for follow-through upside, while EURAUD is once again testing the top of its range at 1.6561 and also the 200-day MA at 1.6595 – a break here and the pair should target 1.7082 in my opinion.

US – Housing starts and building permits (22:30 AEST). Consensus is 1.24m (+4.6% MoM) and 1.32m (+4.9%) respectively. Not expecting this to move markets too intently.

UK-EU trade talks - trade talks will be in focus and pose a risk for GBP and UK100 traders. Cable 1-week vols are not elevated so traders are not expecting outsized moves, while 1-week GBPUSD risk reversals sit at 0.225, showing a modestly higher relative demand for cable call volatility over puts. On the daily chart, GBPUSD is consolidating and needs a break of 1.3171 or 1.3000 to get me excited in this pair.

(GBPUSD daily chart)

Wednesday

UK – headline and core CPI (16:00 AEST). Consensus is looking for 0.6% YoY and 1.3% respectively. Retail price index (RPI – consensus 1.2% YoY)) and PPI out is also released at the same time.

Politics – Dem VP Kamala Harris speaks and officially accepts the position of VP. We also hear from Elizabeth Warren, Nancy Pelosi, and Barack Obama.

Oil – For those trading XBRUSD (Brent crude) or XTIUSD (WTI crude) consider through US trade that OPEC ministers meet (online) to discuss the implementation of the recent output cuts and how they can deal with the issue of compliance. XTIUSD upside has been curbed at the 200-day MA (43.65) and is simply moving sideways – a catalyst, either way, is needed for better trending conditions and one suspects when it comes it could heavily influence other markets.

Canada – July CPI (22:30 AEST). Consensus is for +0.4% MoM and 0.5% YoY. USDCAD is trying to put in a base, but the trend favours selling rallies into 1.3365 on the week (as per Volatility Matrix).

Thursday

US – July FOMC minutes (04:00 AEST). The marquee event risk for the week. With the July FOMC statement and Jay Powell press conference giving us limited colour, the market will explore the minutes for a possible move to far stronger forward guidance in the 18 September FOMC meeting, with real change expected in the Fed’s tolerance for inflation and subsequently its reaction function. The market fully expects findings from its long-running policy review to be detailed at the September FOMC meeting, but there are so many questions economists and strategists need answering, so the market will be on edge to explore this. The bond market is key here and if the Fed can drive down real yields then the USD will follow, and gold will rally and vice versa.

For those who missed, here's my early take on the Sept FOMC meeting.

Europe – July ECB meeting minutes (21:30 AEST). Given the lack of surprise seen in the July statement and presser one suspects this will not be an event risk for EUR exposures.

US - Weekly jobless and continuing claims (both at 22:30 AEST). Consensus sits at 920k and 15m respectively, with the trend heading lower.

Friday

UK – July Retail sales (16:00 AEST). If we include auto fuel the market is looking for 0.1% YoY, but up 2% MoM. We also get July Public sector net borrowing (consensus £28.3b) which is expected to drop from the June print of £35.8bn.

UK – At 18:30 AEST we get UK manufacturing PMI (54.0 from 53.3 in June) and services (57.0 from 56.5). This is the preliminary print, so will get more attention from the market.

Germany – Markit preliminary manufacturing and services PMI (17:30 AEST). The market expects the diffusion index at 52.3 and 55.1 respectively, with manufacturing likely to get the attention and expected to grow at a slightly faster pace in August. We get the Eurozone aggregate manufacturing print 30 minutes later with the consensus at 52.7 (from 51.8 in July).

US – Markit US manufacturing and services PMI (23:45 AEST). Consensus is for 51.5 (from 50.9) and 50.9 (50.0) respectively. The market tends to put more weight on the ISM manufacturing report which is released on 2 September.

Canada – June retail sales (22:30 AEST) – consensus is for +24.5% MoM.

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