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Flight to Safety to Continue as Data to Show Global Weakness

Flight to Safety to Continue as Data to Show Global Weakness

2011-09-12 04:00:00
Christopher Vecchio, CFA, Sr. Currency Strategist

August has historically been one of the slowest months in the financial markets, with lower participation rates as many trading desks are closed for weeks at a time during the summer. However, the calendar has turned to September, historically a terrible month for equity markets and risk-appetite in general. This September is shaping up to be no different, with the European sovereign debt situation at the precipice with rumors swirling of a Greek default as soon as this weekend. With several key events on the docket for the coming week, volatility is likely to be high across U.S. Dollar- and Euro-based pairs.

United Kingdom Consumer Price Index (YoY) (AUG): September 13 – 08:30 GMT

It’s clear that the continued period of low interest rates employed by the Bank of England has certainly allowed inflationary pressures to move in on the British economy once more, with the consumer price index forecasted to show price pressures at 4.5 percent in August.This comes after the inflation rate subsided to 4.2 percent then 4.4 percent in June and July, respectively, after peaking at 4.5 percent in April and May, the highest such clip since October 2008. The Bank of England is ready to sacrifice purchasing power for economic growth, as evidenced by the Monetary Policy Committee’s decision to leave the key interest rate on hold at 0.50 percent at their most recent meeting on Thursday, so a reading above the projected 4.5 percent rate for August would not be unexpected.Join a DailyFX analyst for live coverage of event!

United States Advance Retail Sales (AUG): September 14 – 12:30 GMT

Consumer demand is expected to continue to have remained weak in August, as a Bloomberg News survey shows that the median estimate for Advanced Retail Sales is a 0.2 percent rate of growth last month. Retail sales grew in July by 0.2 percent, though it was speculated that a massive heat wave in the month drove consumers to find shelter indoors at malls, boosting the figure. A recovery in consumer demand is an important part of the U.S. recovery, as nonexistent growth in the labor market – August’s nonfarm payroll report showed that no jobs were added – has put increasing pressure on the Dollar as market participants seek other safe havens. Consumer demand is also important for U.S. growth, as it comprises nearly 70 percent of the aggregate GDP figure. That being said, the Advance Retail Sales figure is the most import data release for the United States this coming week. Join a DailyFX analyst for live coverage of event!

Reserve Bank of New Zealand Rate Decision (SEP 15): September 14 – 21:00 GMT

At its last meeting on July 27, the Reserve Bank of New Zealand decided to maintain its key benchmark interest rate at 2.50 percent, on the outlook that the economy is steadily improving following the earthquakes over the past few months. The decision kept the interest rate at 2.50 percent for the fourth consecutive month. It is widely expected that the key rate will be kept at 2.50 percent at the next monetary policy meeting on September 14, with the Credit Suisse Overnight Index Swaps showing a mere 11.0 percent chance of a 25.0-basis point rate hike. In light of such weak expectations hinging on slowing global growth, the number of basis points priced into the Kiwi over the next 12-months has fallen to 40.0 in recent weeks.

GDP growth figures released on July 13 came in at 1.4 percent, blowing past a forecast of 0.5 percent growth, while recent inflationary data showed inflation increasing to 5.3 percent, topping expectations of 5.1 percent, on a year-over-year basis. Despite higher inflation pressures and higher growth, given the broader global backdrop, it appears unlikely that the Reserve Bank of New Zealand will hike rates next week. Join a DailyFX analyst for live coverage of event!

USD Consumer Price Index (YoY) (AUG): September 15 – 12:30 GMT

According to a Bloomberg News survey, economists forecast U.S. consumer price index tocontinue to show signs of pressure, with the median estimate calling for a 0.2 percent gain in August, on a monthly basis. Year-over-year, the index is expected to show that price pressures held at 3.6 percent in August, the same level in July. Prior to next week’s release, the consumer price index has steadily risen from 1.6 percent to 3.6 percent in 2011. The consumer price index is the headline figure for inflation, reflecting a decline in the purchasing power of the dollar. However, inflation can also be a sign of a healthy economy.

The objective of the Federal Reserve’s quantitative easing stimulus program was to achieve a target inflation rate of about 2 percent. If this is the beginning of a downward trend for inflation, the Fed may have more reasons to embark on another round of easing to avert any deflationary risk in addition to providing economic stimulus. Join a DailyFX analyst for live coverage of event!

United States U. of Michigan Consumer Confidence (SEP P): September 16 – 13:55 GMT

Consumer confidence in the United States is forecasted to rebound slightly in September’s preliminary reading, after disappointing over the past few months. August’s reading droppedbelow the 60.0 level, at 55.7, down from 63.7 at the prior reading. The figure is expected to remain below said level, with a 56.5 initial forecast, according to a Bloomberg News survey. Despite a rebound in sentiment forecasted, it is likely to be short-lived if there is one. The labor market remains weak, with no jobs added in August; inflation is at its highest pace in years; growth figures are showing signs of weakness; and the European sovereign debt crisis could result in a liquidity freeze. Any rebounds in sentiment are likely to be short-lived, and a break below the key 50.0 level would not be surprised.Join a DailyFX analyst for live coverage of event!

Rate Hike Probabilities / Basis Point Expectations (12-months)

Flight_to_Safety_to_Continue_as_Data_to_Show_Global_Weakness_body_Picture_1.png, Flight to Safety to Continue as Data to Show Global Weakness

See the DailyFX Calendar for a full list, timetable, and consensus forecasts for upcoming economic indicators.

Written by Christopher Vecchio, Currency Analyst

To contact the author of this report, please send inquiries to: cvecchio@dailyfx.com

Follow Christopher Vecchio on Twitter: @CVecchioFX

DailyFX provides forex news and technical analysis on the trends that influence the global currency markets.


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