While risk trends continue to dominate price action in the forex markets, a series of economic indicators this week - including two potential rate cuts - could have an impact on currencies like the US dollar, Euro, British pound, Canadian dollar, and Australian dollar. Here are the key events we think you should be watching this week…
Reserve Bank of Australia (RBA) Rate Decision – October 6
According to a Bloomberg News poll of economists, the Reserve Bank of Australia is expected to cut rates by 50bps to 6.50 percent. This would mark the lowest rate in a year and the second rate cut in a row, as the RBA reduced the cash rate by 25bps on September 2. While inflation remains above the RBA’s 2-3 percent target, signs of slowing domestic and international demand led the Reserve Bank Board to judge in September that there was room for interest rates to become “less restrictive.” Meanwhile, Credit Suisse overnight index swaps are pricing in over 150bps worth of rate cuts during the next 12 months, and if the global economic slowdown and deterioration in the financial markets continues, we’ll like see this come to fruition. They key to trading the Australian dollar after the announcement will be to determine if the Board’s policy statement suggests this as well.
Federal Open Market Committee (FOMC) Meeting Minutes from September – October 7
On Tuesday, the minutes from the Federal Open Market Committee’s September meeting will be released and this could draw attention once again to the problems plaguing the US economy. It was somewhat surprising to see the markets completely brush off the disappointing non-farm payrolls numbers on Friday, as the risks for recession remain very high. However, bearish commentary by the FOMC members may enough to remain traders just how bad things are. Fed fund futures are fully pricing in a 50bp cut on October 29, and if the minutes suggest that the Committee may actually consider cutting rates, the US dollar could pull back sharply.
Australian Net Employment Change, Unemployment Rate – October 8
The Australian labor markets have tightened substantially over the past few years, as the unemployment rate dropped to multi-decade lows of 4.0 percent in February. However, after the Reserve Bank of Australia left interest rates at a 16-year high of 7.25 percent for much of 2008, the labor markets have shown signs of deterioration, along with domestic demand in general. While the RBA has changed their tone and will likely continue to cut rates through the end of the year, the Australian unemployment rate is anticipated to pick up to 4.3 percent while the net employment change is forecasted to fall flat after rising for the past three months, and this tends to have a greater impact on the Aussie than the unemployment rate. Indeed, like the US Non-Farm Payrolls release, the figure rarely meets expectations and can lead to volatile short-term price action for the Australian dollar immediately following the news at 20:30 EDT.
Bank of England Rate Decision – October 9
On October 3, the Bank of England, which has been the most resistant central bank to helping banks during the credit crisis, actually said it would widen the range of collateral it accepts at three-month operations in an effort to boost liquidity. The BOE has said it will take asset-backed commercial paper with the highest short-term ratings along with top-rated securities tied to “some” corporate and consumer loans. This move, along with dismal UK economic data, has led the markets to widely expect a 25bp rate cut to 4.75 percent by the Bank of England on October. While UK CPI remains well above the BOE’s 2 percent target and 3 percent ceiling at 4.7 percent, the Monetary Policy Committee is going to have a hard time ignoring the 5 consecutive months of contraction in the services and manufacturing sectors, along with the persistent decline in home prices. If the BOE does indeed cut rates, the news will likely weigh on the British pound. However, if the central bank shocks the market and leaves monetary policy unchanged, GBP/USD could easily surge higher.
Canadian Net Employment Change, Unemployment Rate – October 10
Though often finding its thunder has stolen been stolen by its US counterpart, history shows that the Canadian employment change is consistently a top market moving indicator. Employment in Canada is a clear sign of economic health and an indicator of expansion going forward. The reading for September is anticipated to show that the Canadian labor markets added on an additional 10,000 workers, though the unemployment rate is expected to pick up to 6.2 percent. However, looking at the Ivey PMI numbers for the same period, there is downside risk for this report as the employment component fell below 50 (signaling contraction). Since December 2007, when Ivey PMI has indicated a contraction in employment, the net employment change has fallen negative. As a result, significant bearish potential remains for the Canadian dollar.
See the DailyFX Calendar for a full list, timetable, and consensus forecasts for upcoming economic indicators.
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