Now that the Euro-zone Summit has come to pass with some promising results, focus turns to the European Central Bank meeting this week to see if monetary officials deliver a much-needed rate cut. With respect to this, we believe that a rate cut by the ECB should be supportive of the Euro. In terms of the other major meetings – the Reserve Bank of Australia on Tuesday and the Bank of England on Thursday – any further efforts to loosen their respective monetary policies will hurt their local currencies.
07/02 Monday // 14:00 GMT: USD ISM Manufacturing (JUN)
Manufacturing continues to expand in the US but at a slower pace, the ISM Manufacturing report will show on Monday. The diffusion index is expected to decrease to 52.0 in June from 53.5 in May, showing expansion albeit at a slower pace. If the actual print meets the consensus forecast, it will be the weakest reading of all of 2012 and the worst reading since October 2011 (51.8). The Durable Goods Orders report last week was stronger than expected, so it’s possible that the ISM Manufacturing report starts to turn higher again in the coming months. On a related note, the ISM Prices Paid reading is expected to show that prices are falling at a faster pace. The key pairs to watch are USDCAD and USDJPY.
07/03 Tuesday // 04:30 GMT: AUD Reserve Bank of Australia Rate Decision
The RBA is expected to keep its key rate on hold at 3.50 percent on Tuesday, all while neutralizing its tone in its policy statement. While the RBA cut rates from 4.75 percent to 3.50 percent since November 2011, it’s clear that the Australian economy is taking on the rate cuts swimmingly: first quarter GDP was well-beyond expectations; the labor market, fueled by strong demand for commodities, continues to expand rapidly; and the housing sector isn’t looking as weak as it was at the beginning of the year. The Credit Suisse Overnight Index Swaps show that 82.0-bps are being priced out of the AUD over the next 12-months, and that there is only a 15.0 percent chance of a 25.0-bps rate cut at Tuesday’s meeting. The key pairs to watch are AUDJPY and AUDUSD.
07/05 Thursday // 11:00 GMT: GBP Bank of England Rate Decision
Expectations for the BoE to ease further are riding high, with the consensus survey provided by Bloomberg News showing that economists forecast that the Asset Purchase Program target will be raised to £375 billion from £325 billion. All the while, the key interest rate should remain unchanged at 0.50 percent, where it has been on hold since March 2009. Ahead of the Greek elections, the BoE alongside the UK Treasury announced plans for a major liquidity program to help credit flow to small businesses, and it is possible that some more of those plans are disclosed this week. Ultimately, we expect the BoE to cave and ease more, as there are few other viable options at this point in time. The key pairs to watch are GBPJPY and GBPUSD.
07/05 Thursday // 11:45 GMT: EUR European Central Bank Rate Decision
The Euro-zone Summit yielded the results that the ECB has longed to see: political leaders coming together to implement a plan that will stem the crisis. However, any help from the fiscal side of the growth equation looks to be limited, and the ECB is essentially having its hand forced to implement new measures to help control the spread of the crisis from the periphery into the core. With that said, we think that the ECB’s stance has been softening (or leaning towards easing), in the sense that the German economy is starting to experience some of the backlash from the crisis (slower growth, falling price pressures). This month’s ECB rate decision will reveal this: if the ECB cuts rates, it thus believes politicians have done enough to warrant further help from monetary officials; if the ECB does not change its policies, then it is a sign that the ECB believes more needs to be done by political leaders. A rate cut will be supportive of a stronger Euro – just like how the July 2011 rate hike was deconstructive. The key pairs to watch are EURGBP, EURJPY, and EURUSD.
07/06 Friday // 12:30 GMT: USD Change in Nonfarm Payrolls (JUN)
This is the most important event of the week. The US labor market has been expanding at a slower pace than most have anticipated in recent months, at an average rate of +101.3K from March through May after expanding at an average pace of +223.3K from December through February. Since December, though, the Unemployment Rate has fallen from 8.5 percent to as low as 8.1 percent in April, before bouncing up to 8.2 percent in May. Questions remain over how much the unseasonably warm winter has had on the employment picture, and by now, any of these backlashes should have run its course. According to a Bloomberg News survey, jobs growth should come in at a mere +90K, above to +69K from May. Similarly, the immaterial figure will leave the Unemployment Rate unchanged at 8.2 percent in June. A stronger figure will be supportive of a stronger US Dollar while a weak figure will inevitably stoke the QE3 fire. The key pairs to watch are EURUSD and USDJPY.
Rate Hike Probabilities / Basis-Points Expectations
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--- Written by Christopher Vecchio, Currency Analyst
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