In the wake of the Federal Reserve’s and the European Central Bank’s respective rate decisions, two points are becoming increasingly salient: policymakers want to introduce more easing efforts to help calm financial tensions and global growth concerns, but cannot at present time. Accordingly, when considered alongside the July Nonfarm Payrolls report, we believe that the US Dollar near-term fundamental outlook is constructive.
We also find that the Euro’s near-term outlook is constructive as well, given the apparent effort by European Central Bank President Mario Draghi to signal his willingness to push for a bond buying program, should Spain seek bailout assistance via the EFSF/ESM (Europe’s bailout mechanisms).
After a heavily saturated economic calendar last week, the first full-week of August offers a reprieve, with little influential data out of Europe or the United States. Accordingly, global growth concerns could come back into the foreground with key data out of Australia and China due.
08/07 Tuesday // 04:30 GMT: AUD Reserve Bank of Australia Rate Decision
The Reserve Bank of Australia is expected to keep its key interest rate on hold at 3.50% for the second consecutive month on Tuesday, according to a Bloomberg News survey, after having cut it to its current level from 3.75% in June. This was preceded by another 25.0-basis point cut from 4.00% in May. According to the Credit Suisse Overnight Index Swaps, odds for a rate cut have dropped substantially over the past several weeks, with only a 16.0% chance of a 25.0-bps rate cut being priced in at present time, from a 71.0% chance on July 12. If there is a rate cut, it will catch market participants off guard, and likely sending the Aussie much lower; this is the least likely outcome, however. The key pairs to watch are AUDJPY and AUDUSD.
08/07 Tuesday // 14:00 GMT: GBP NIESR Gross Domestic Product Estimate (JUL)
The British economy is back in the doldrums (did it ever leave?), and despite the 2012 London Olympics, growth was unlikely to have picked back up in July. While there is not aggregate survey figure provided, our model finds that the British economy most likely contracted by -0.2% to -0.3%, the NIESR Gross Domestic Product Estimate will show on Tuesday. 2012 hasn’t been a kind year for the British economy, with the NIESR GDP Estimates showing growth only once thus far, and with three of the six readings showing contraction of -0.3% or greater. Should the British economy continue to struggle, this will likely amount to increased odds of further easing by the Bank of England, which will dilute the value of the British Pound. The key pairs to watch are EURGBP and GBPUSD.
08/09 Thursday // 01:30 GMT: AUD Employment Change and Unemployment Rate (JUL)
According to a Bloomberg News survey, the Australian economy added +10.0K jobs in July, have having shed -27.0K in June. This would represent only a modest improvement for the labor market, which has been adding an average of +4.6K jobs per month for the past three-months. What we’ve noticed over the past several months, and especially in 2012 on the whole, is that forecasters have tended to miss, and miss by a fair margin (2.5 to 3 standard deviations, in some cases), on Australian labor market forecasts. Thus, we think a surprise is not out of the picture, given what history has displayed. The key pairs to watch are AUDJPY and AUDUSD.
08/09 Thursday // 01:30 GMT: CNY Chinese Consumer Price Index (JUL)
In what has become the preeminent gauge for Chinese growth, the Consumer Price Index for July is arguably the most important event on the docket this week. According to a Bloomberg News survey, consumer price pressures retreated to a rate of +1.7% year-over-year in July, down from +2.2% in June. This would represent the softest y/y CPI reading since January 2010, when inflation was +1.5% (the expected +1.7% print would be the first sub-2.0% print since January 2010 as well). While a soft reading could spur some hopes that the People’s Bank of China may be inclined to introduce new stimulus, it likely means that growth is slowing further; over the past two-years, Chinese CPI and GDP have held a +0.645 correlation. We expect a weak reading, which could weigh on the Australian Dollar. The key pairs to watch are AUDJPY and AUDUSD.
08/10 Friday // 12:30 GMT: CAD Net Change in Employment and Unemployment Rate (JUL)
The Canadian economy’s labor market remained resilient in July, having added another +9.0K jobs, according to a Bloomberg News survey. This won’t be strong enough jobs growth to move the Unemployment Rate, however, which will remain on hold at 7.2%. The expected print of +9.0K would also undershoot the three-month average of +24.4K. We believe that while jobs growth will be uninspiring, we note that it is possible that the Unemployment Rate increases on a higher participation rate; if the Canadian Dollar sells-off on such an occurrence, we would view this opportunity as a chance to buy the Canadian Dollar. The key pairs to watch are CADJPY and USDCAD.
Rate Hike Probabilities / Basis-Points Expectations
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--- Written by Christopher Vecchio, Currency Analyst
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