Dollar Looking for Direction as Consumer Demand Gains, Rate Hike Expectations Rise
Similar to this week, when three central banks issued rate decisions, two more are on the docket for the first full week of March. Surprisingly, while all other central banks have discussed either holding rates for a few more months, or even stated that they would consider raising rates as soon as next meeting, the RBNZ is expected to lower rates in order to prop up what has been slipping consumer demand. On the contrary, the BoE is expected to keep their rates on hold at their meeting on Wednesday, citing tempered inflation pressures. As stated last week, “officials from central banks across the globe have shifted their tones, with respect towards how accommodative policies will be going forward”; such was the case this past week when ECB President Jean-Claude Trichet hinted that the ECB could hike rates as soon as next meeting. The other major data releases for the week come out of North America, in which Canadian labor market conditions will be examined, and U.S. consumer demand will be under the microscope as it could provide evidence to rate hawks for a shift in policy by the FOMC. It appears that it is only a matter of time until major central banks are forced to hike their rates in order to fight rising prices, a rhetoric that the ECB appears to be ahead of the curve on.
- Reserve Bank of New Zealand Rate Decision (MAR): March 9 – 20:00 GMT
Despite food prices and producer prices rising in January, according to their most recent data releases, Reserve Bank of New Zealand policymakers appear to be unconcerned with rising inflationary pressures in the Pacific Rim’s economy. More importantly, housing prices continue to fall, while consumer spending has been tapering off – evidenced by a decline in retail sales in December, which fell by -1.1 percent. Consumer confidence has fallen as well, down 7.7 percent in its most recent reading. As such, with inflation currently tethered within the RBNZ’s acceptable medium-term range, markets have begun to price in a rate cut of 15-bps over the next 12-months. The median survey figure, according to a Bloomberg News survey, for the rate decision on Wednesday indicates that economists are expected the RBNZ to cut their rates to 2.88 percent, a move that would signal the necessity for looser lending restrictions in order to ensure that growth in New Zealand continues over the medium-term. Join a DailyFX analyst for live coverage of event!
- Bank of England Rate Decision, Asset Purchase Target (MAR): March 10 – 12:00 GMT
While the Bank of England is widely expected to keep their key overnight interest rate on hold at 50-bps at their meeting on Wednesday, though according to the Credit Suisse Overnight Index Swaps, there is a slight 17.0 percent chance that Bank of England policymakers vote to hike rates now. The OIS shows that markets are pricing in a rate hike of 81-bps over the next 12-months, slightly down from the previous reading as policymakers have recently talked down the impact of rising price pressures on economic growth. True, the CPI only grew by 0.1 percent month-over-month in January, though it was up 4.0 percent year-over-year. These figures are misleading: the PPI confirms that inflationary pressures are indeed building; at 1.0 percent in January month-over-month, and 4.8 percent year-over-year, producers are absorbing rising costs instead of passing them onto consumers. When that happens, as it inevitably will, the Bank of England will be forced to readjust their monetary policy stance with a more hawkish bias. Join a DailyFX analyst for live coverage of event!
- Canadian Net Change in Employment (FEB): March 11 – 12:00 GMT
Economists are particularly bullish on the upcoming Canadian labor market reading, after January’s job creation was four times more than the median Bloomberg News forecast. The result was the Canadian Dollar rising to its strongest level since May 2008. Another strong report will cement the notion that the Canadian economy will be ‘officially out of the woods,’ but the stronger currency has had negative implications. Certainly, a strong Loonie has caused a slowdown in the growth of household and government spending, which led to the decline in Canadian gross domestic product at the end of last year. Now that the Canadian economy has added all of its jobs it lost in the recession, further job creation will start bring the unemployment rate back towards its natural rate, which in turn will lead to further Canadian Dollar strength.
- U.S. Advance Retail Sales (FEB): March 11 – 13:30 GMT
Signs of the recovery in the United States gained steam after last month’s retail sales data, and a similar reaction can be expected this month too. Retail sales have been growing every month since last June, a sign that the Federal Reserve’s efforts to inject liquidity in capital markets might in fact have had a positive effect on the American consumer. Nonetheless, a Bloomberg News survey shows that retail sales are forecasted to have expanded by 1.0 percent in February. The gain would be its strongest reading since October, the last time sales expanded by greater than 1.0 percent. Further positive readings could have far reaching ramifications, such as further discussion that the FOMC needs to wind down its most recent round of quantitative easing.
- U.S. U. of Michigan Consumer Confidence (MAR P): March 11 – 14:55 GMT
U.S. consumer confidence is forecasted to deteriorateafter improving two months in a row, from 77.5 to 76.5, as rising commodity prices, particularly oil, have begun to weigh on consumer. The deteriorating outlook is not expected to drop below 70.0, a reading it took four months to reach at the end of last year after dropping below 70.0 in July. Should oil prices remain elevated about $100 per barrel, sentiment could further wane headed into the summer as gas prices typically rise during the middle of the year in the United states. Strong domestic demand evidenced by improving retail sales will help companies maintain recent profit levels and could inspire new hiring, and support confidence. Price action for Dollar-based pairs should be particularly volatile on Friday following both significant U.S. data releases. Join a DailyFX analyst for live coverage of event!
See the DailyFX Calendar for a full list, timetable, and consensus forecasts for upcoming economic indicators.
Written by Christopher Vecchio, DailyFX Research.
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