Small countries have done a better job containing and dealing with the pandemic, and a good example in this case is Taiwan. Some bigger countries like Germany have also done a good job and this was possible, in my view, mainly because of their sense of civic duty and respect for others; people were responsible and took caution while meeting others.

But one of the big questions that we all must ask is how Europe will look after COVID-19? United, strong or divided and weakened? As we can see this crisis will last longer than initially thought. The “V” shape recovery is off the table. Some now talk about a “U” shape or even an “L” shape. With the second wave already here and a third one potentially at the door when temperatures drop it’s hard to say exactly how long it will take to reach the economic growth we had before the pandemic. Will the world ever be the same after this pandemic? And there is no right answer for this because the world is constantly adapting and has survived all past pandemics.

Regarding the situation in Europe, Timothy Garton Ash said in an interview for the Hoover Institution that there are at least three main problems and divisive tendencies:

• Brexit;
• the North-South divide: inside the eurozone the wealthier creditor countries like Germany and the Netherlands in the North and the poorer debtor nations like Italy, Spain, Portugal, Greece in the South. Italy and Spain were already hit first by the eurozone crisis and now by the pandemic. The question is how things will work between those two sides;
• the West-East divide: countries like Hungary which in many views is no longer democratic, and of course Poland — a good example of eroding rule of law and democracy at a high rate who’s taking the opportunity to accelerate it in the pandemic.

So we must ask again which of those problems will contribute more to the process of the disintegration of the European Union. Will the EU deal with this problem or will it remain there like a bomb ready to explode at any time? Unfortunately, the pandemic is a big test. Italy pointed out that the EU abandoned them and in one poll 42% of Italians were in favor of leaving the Union.

The EU must become aware of these threats and must do the necessary work to solve them in order to overcome this phase. In Hungary and Poland, as in other countries that are not necessarily EU members, we’ve seen an alarming rise of populism and it’s concerning.

Another problem for the EU are the Brexit negotiations who were affected by the pandemic and the chance of a no-deal Brexit or hard Brexit is high. The UK faces a big impact on its economy because of the pandemic and the Johnson government will take the opportunity to blame only the pandemic, not the failed Brexit negotiations as well.

My personal opinion is that the EU could pass this test if all countries put aside their differences and decide to fight together because it’s easier to deal with a big threat if you are strong and united. And when I say a big threat, I’m also thinking of China who is probably the biggest geopolitical threat not only for Europe, but for the entire world, including Russia in my opinion.

We all have seen the tensions between the US and China rise. And as T G Ash said, this is a new form of a cold war. There is a difference between this cold war and the previous one because back then, unlike now, “Europe was on its knees, weak and poor and it was West Europeans who were trying to keep the US in Europe to stand up to the Soviet Union.” Of course, this is no longer the case now because Europe is stronger, richer and more powerful and it’s standing between US and China.

But where do they position themselves on this matter? The answer is more complicated than it seems. Europe has seen during the pandemic how dependent they are on China for masks and other medical equipment and they will likely try to reduce this dependency in the future because Europe is becoming more and more skeptical about China. On the other hand, China is a big investor in Europe and it’s not impossible that if these investments grow, China will gain influence in certain countries and gain a seat at the negotiations table in the EU. For the moment this is less likely but who knows what the future brings.

Events of the week

Main events of the week are:
Monday 25 September – German election and NZD elections; both failed to obtain majority;
BOJ Gov Kuroda Speaks; ECB President Draghi Speaks;
Tuesday 26 September for USD – CB Consumer Confidence; FED Chair Yellen Speaks;
Wednesday 27 September for USD – Crude Oil Inventories; for CAD – BOC Gov Poloz Speaks; for NZD – Official Cash Rate and RBNZ Rate Statement.

EUR seems to be affected by Merkel’s results which performed weaker than expected. Now a coalition is needed meaning a ‘Jamaica’ Coalition with the FDP and Green Parties is possible. Anyway, German elections is not a main driven factor for euro evolution. Most important for its evolution is inflation who is admitted to be still soft, lower than expected, but reflation is ongoing according to Swiss private bank Edmond de Rothschild.
As some of you know the ECB suggested that it would announce the end of QE. Lyxor’s senior credit strategist Lionel Melin thinks it is likely that the ECB will announce the end of its quantitative easing programme during its October session. That’s why October’s meeting is expected to be a very important one.

The Bank of England is expected to raise rates in coming months, the raise will be data dependent.

From Bank of Japan, there are no signs of a big change. BOJ is ready to continue actual monetary policy and buying assets in order to maintain the 10-year Japanese Government Bonds at its 0% target. It’s hard to tell when BOJ will reach the inflation target of 2% especially since BOJ postponed the deadline for it.
PM Abe announces the dissolution of lower house. The election is rumored to be on 22 October.
CAD is quite since Friday. It is influenced by oil price, but the price was flat Monday morning, then Brent crude oil jumped towards $58 a barrel for the moment. OPEC Sec-Gen Barkindo says that OPEC will keep pressing ahead with their efforts until they reach their goal of a fully balanced and growing, sustainable global oil market and industry. The boost in oil price is given by treats that come from Turkey to Iraqi Kurdistan for organizing an independence referendum.
“We have the tap. The moment we close the tap, then it’s done,” President Erdogan said and warned Erbil that Turkey has controls over the pipelines through which the autonomous region’s oil reaches international markets according to Financial Times.

At RBNZ Rates Meeting no change in the communication is expected according to analysts from BoFA.

USD: FOMC’s statement was more hawkish than traders and investors had hoped. This is a good thing for USD. As expected, the FED keeps rates on hold and plans to start the balance-sheet reduction in October. The statement was quite optimistic about growth and employment. The “dot plot” chart for September showed median expectations for 2017 and 2018 which remain at 1.4% and 2.1%. Another rate hike is on the table until the end of the year and another 3 hikes in 2018. According to Bloomberg WIRP, chances for a December hike are 63.8% from 53.2% previously.

NZD: There is no doubt that NZD is driven by political factors. Financial Times said that a new poll shows the governing National Party could rule alone after the country’s general election on September 23. The economist Shamubeel Eaqub said in an interview for Financial Times on September 12 that the kiwi had been spiking up and down on the polls and it’s most likely this will continue to happen until Saturday.

JPY: BOJ left its target interest rates and asset purchase program unchanged as expected. In a Bloomberg survey, 45 economists agreed on the possibility of no change in monetary policy. The vote was 8-1, with Goushi Kataoka objecting.

EUR: Before FOMC some ECB members were concerned about euro strength. With that in mind, the October meeting could be a very important one because ECB members will decide on their 2018 quantitative easing position and whether to adjust its forward guidance.

Today I will start my analysis with NZD, which is in focus because of the national elections in New Zealand. The last poll suggests that the National Party has the lead over the Labour Party with 47%. Analysts from Citibank cite a report that says there’s a possibility, in case of a victory, for the Labour Party to require the RBNZ to consider job market conditions when deciding over monetary policy. Labour Party is in favor of implementing policies to limit immigration. In such a situation, NZD may be restrained. RBNZ is expected to keep rates on hold until the end of the year.

Analysts from Bank of New Zealand suggest that if the FED goes on with rate normalization — meaning a rate hike in December and more hikes in 2018 — the market will be seen to under-price the change of FED hikes through the end of the year.

Based on their point of view, if they are right, the NZD could move under 0.70 next year and, if they are wrong, then easy US monetary conditions will support higher levels of risk appetite and a stronger NZD than expected.

Taking a look at NZD/USD on MN chart we see a possibility for a correction until 0.7705 even if it seems less likely until the end of 2017.

But it looks like we will have to wait a long time until NZD/USD reaches that level. Taking a closer look we have the H1 chart which to me is neutral. I have a scenario for a possible move, as shown in the image below, and if that move happens, I will look for a sell limit.

If NZD/USD doesn’t cross 0.7320 and then goes back to 0.7220, I will look for a sell limit at 0.7290. If NZD/USD reach 0.7320 and cross over 0.7345 I will probably look for a buying opportunity. Updates to come. I will wait for the first scenario and then take an action. Now for me NZD/USD is neutral.

If NZD/USD instead reaches 0.7320 and crosses over 0.7345, I will probably look for a buying opportunity. Updates to come. I will wait for the first scenario and then take action. To me, NZD/USD looks neutral right now.

Happy pips!

Monday 18 September – Eurozone CPI (yoy) came as expected 1,5%;
Tuesday 19 September for EUR – Germany Zew Survey expectation 32.4;
Wednesday 20 September for USD – Federal Open Market Committee Interest Rate decision;
Thursday 21 September for JPY – Bank of Japan Interest rate decision.

It’s no doubt that spotlight is on FOMC and BOJ. The FOMC is expected to keep rates on hold and to announce the tapering of its 4,5 trillion USD balance sheet. As always, the FED is preparing the market and makes its decisions predictable.

Analysts expect only one hike this year, most likely in December, and two hikes next year. The market will wait to see if any modifications occur on “dot plot.” Taking into consideration the rumors of no further rate rise this year, this will be a dovish signal by the markets.

For the BOJ things are simple because it is expected to leave its Policy Balance Rate and the 10-year Japanese government bond yield target unchanged, at -0.1% and around 0%, respectively. Personally, I don’t exclude a surprise in changing the target amount of Japanese government bond buying coming from the BOJ, even if it’s less likely.

GBP: BOE kept the rate on hold yesterday and MPC voted 7 – 2 in favor as expected. Some analysts say the Official Bank Rate might rise this year due to concerns regarding inflation pressure. BOE Governor Mark Carney said in the past that the interest rate will remain unchanged for a long period of time, suggesting we might see no change this year. Since then conditions have changed and Mark Carney said in his post-decision press conference that there is a possibility for a rate hike. Some analysts say that November could be a good moment for it, although Carney noted that a modest adjustment is in discussion and that the BOE will take a decision based on future data.

Brexit concerns are still present but don’t impact the market too hard. Theresa May is expected to deliver a speech of high importance next week on September 22 in Florence. There are rumors that she will go ahead with a soft Brexit.

SNB: CHF is still overvalued and the bank will intervene if necessary. The interest rate was left unchanged.

EUR: ECB Weidmann said that QE is an emergency instrument to ward off deflation and deflation is largely gone. He also noted that ECB should not miss the right moment for normalization and that monetary policy will remain exceptionally easy even after QE will end.

USD seems to weaken even if August CPI was above expectation. After the latest data, there is a possibility for a rate hike in December. According to Bloomberg, WIRP expectations rose from 38,9% to 43,4%. FED is more concerned with inflation in contrast to Trump administration which is concerned about economic growth.

AUD is still strong against the USD. Copper price has weakened lately but rebounded this morning.

NZD is influenced at the moment by political factors that will last until September 23 when general elections are scheduled.