Volatility liable to ease slightly
Volatility levels in currency markets could still be high, but there is slightly less cope for extreme moves as central banks continue to supply high levels of liquidity.
Coronavirus exit strategies in focus
Global coronavirus developments will inevitably remain extremely important for market sentiment in the short term. Within Europe, there has been tentative evidence that the number of new cases has started to peak and that the increase in deaths has also started to slow.
If this pattern is sustained, there will be increased pressure for a gradual easing of lockdown measures to allow the economy to re-start.
Austria and Denmark and planning to ease some measures this week and Spain is looking to re-open some businesses. A gradual easing of lockdown restrictions would help support market sentiment.
Longer-term policy trends in focus
Rhetoric from central banks will be watched closely and there will be further buying of bonds to help cap upward pressure on bond yields. There is no real scope to cut interest rates further, but banks will remain under pressure to provide support through loan guarantees.
Markets will start looking at the longer-term implications of central bank and government policies. Over the medium term, there will be a very big increase in central bank ownership of bonds and government budget deficits will increase extremely sharply with the risk that markets will take fright and dump individual currencies due to fears over heavy longer-term devaluations.
Medium-term policy management will, therefore, be extremely important for underlying currency sentiment.
The latest jobless claims data on Thursday will again be the most important release during the week after the huge increase in claims seen over the past three weeks. Consensus forecasts are for an increase of close to 5.0 million on the week after two successive increases of 6.6mn. A larger reduction would have some positive impact in underpinning sentiment.
Retail sales data is due on Wednesday with a headline forecast decline of around 8% as lockdown measures take effect.
Business confidence data will be monitored closely with the New York Empire manufacturing survey on Wednesday and Philly Fed survey on Thursday.
There are no major economic data releases during the week, but one measure of retail sales is likely to be released which is likely to show a sharp decline for March.
Developments in EU/UK trade talks will be watched closely, but coronavirus developments will tend to dominate.
The Euro-zone data releases are unlikely to have a significant impact. The main focus is likely to be on political developments as attempts to support the economy continue following outline approval of the EUR540mn support package.
The Bank of Canada will hold its regular policy meeting on Wednesday. The central bank has already cut rates three times in March to combat the downturn and also introduced a bond-buying programme. Rhetoric from the bank and expectations of economic developments will have a significant currency impact.
China’s GDP data is due for release on Friday and there will inevitably be a substantial impact from the coronavirus outbreak with mush of the country in lockdown during February.
Market expectations are for a year-on-year decline of around 6.0%. There will also be data on industrial production and retail sales. Chinese trade data is likely to be released on March.
Australian labour-market data is due on Thursday with a notable decline in employment expected.
Currency FX Forecast for Next Week
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