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Five Rate Decisions Ahead; ECB Meeting, Euro-zone Summit Headline Week

Five Rate Decisions Ahead; ECB Meeting, Euro-zone Summit Headline Week

2011-12-05 11:00:00
Christopher Vecchio, CFA, Sr. Currency Strategist
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Like the Thanksgiving week, which produced uncommon results and the worst performance across American equity markets since 1932, this past week broke free of its historical trends as well. The Monday after the typically slow week often yields negative results; the S&P 500 gained nearly 3 percent. Needless to say, markets are ignoring seasonality trends, and traditional end of year strategies may not work.

Much ado has been made about the “Santa Claus” rally to close out the year, considering since 1990, the S&P 500 has averaged a December return of 2.02 percent with positive returns approximately 81 percent of the time. However, when the S&P 500 enters the month down on the year, returns in December since 1990 are nearly unchanged. Thus, without the central bank intervention on Wednesday (which was suggested as a possible event as per last week’s column), December’s forecast would not be sanguine.

With that said, in terms of scheduled event risk for the coming week, the docket is as dense as it could possibly be at this time of year, and is the most important week remaining in 2011 (barring another Euro-zone summit before market liquidity is almost completely drained). Event risk picks up on Tuesday, when the Reserve Bank of Australia meets; it is the first of five central bank meetings this week. The Bank of Canada and Reserve Bank of New Zealand follow on Tuesday and Wednesday, respectively, culminating in the Bank of England and European Central Bank meetings on Thursday. But for the Euro-zone summit from Thursday to Friday, the ECB policy meeting is the most important event on the schedule this week. Event risk remains heavily-weighted in favor of the Euro, and given the cloud of uncertainty surrounding the common market, Euro-based pairs will be our primary focus going forward.

AUD Reserve Bank of Australia Rate Decision: December 6 – 03:30 GMT

The Reserve Bank of Australia will hold its December meeting on Tuesday, where it is expected that the rate will be cut to 4.25from 4.50 percent. At the previous board meeting in November, the RBA decided to cut the key rate to 4.50 percent from 4.75 percent, a level that was unchanged since November 2010. According to the Credit Suisse Overnight Index Swaps, there is an 84.0 percent chance of a 25-basis point rate cut at the central bank meeting on Tuesday. Accordingly, 129.0-basis points are being priced out over the next 12-months, in line with the expectation of a rate cut at the coming meeting. Considering expectations for a cut are so heavy, if the RBA does not budge, the Australian Dollar should find some significant support. The rhetoric in the statement following the meeting is vital. Join a DailyFX analyst for live coverage of event!

GBP Bank of England Rate Decision: December 8 – 12:00 GMT

The Bank of England’s Monetary Policy Committee is expected to maintain its key benchmark rate at 0.50 percent at its meeting on Thursday, the same rate held since March 2009. The primary underlying reasonto maintain the rate continues to be the Monetary Policy Committee’s focus on economic growth rather than on reducing inflation, which ticked higher recently.The Overnight Index Swaps suggests rates will be on hold for some time, with a 1.0 percent chance of a rate cut at the meeting on Thursday. It is also important to watch whether or not the Committee expands the central bank’s asset purchase program again – it was increased to £275 billion at the October meeting – a move that would be an extension of quantitative easing, thus weakening the British Pound.

EUR European Central Bank Rate Decision: December 8 – 12:45 GMT

The European Central Bank is expected to cut its key interest rate to 1.00 percent at its meeting on December 8. At the previous ECB meeting in November, the Governing Council, in Mario Draghi’s first meeting as President, cut the key rate to 1.25 percent from 1.50 percent. According to the Credit Suisse Overnight Index Swaps, there is an 81.3 percent chance of a 25-basis point rate cut at the central bank meeting on Tuesday. As Euro-zone growth stalls and increasing pressure brought by the market comes down on periphery nations’ bond markets, Draghi has fielded an increasing number of calls by politicians and market participants alike to ease further, as a way to keep liquidity flowing. In fact, interbank lending has become such a concern that coordinated intervention last week was necessary to prevent the collapse of a major Euro-zone bank (rumored to be Credit Agricole). Save the Euro-zone Summit, this is the most important event of the week. Join a DailyFX analyst for live coverage of event!

USD United States U. of Michigan Consumer Confidence (DEC P): December 9 – 14:55 GMT

Consumer confidence in the United States is forecasted to improve slightly in December’s preliminary reading, after rebounding in November back to 64.1. The 65.8 forecasted print comes after a string of better-than-expected data out of the United States suggests that the world’s largest economy might be able to avoid the second leg of a double dip recession, should the Euro-zone manage to stay together. Recent headwinds to confidence in recent weeks have been a deteriorating labor market and volatile oil prices, but with the United States avoiding another downgrade after the debt debate passed in November, confidence is expected to firm. Join a DailyFX analyst for live coverage of event!

EUR Euro-zone Leaders’ Summit: December 8 to 9 – --:-- GMT

Just a month after the October summit that was expected to “solve everything,” Euro-zone leaders are back in Brussels to find agreement on how to stem the region’s quickly-spreading debt crisis. German Chancellor Angela Merkel and French President Nicolas Sarkozy are expected to meet on Monday to unify their positions going into the meetings, and it is expected that they will announce that some sort of measures have been agreed upon ahead of the summit. This should lead to a rally in risk-appetite in the short-term, although no new measures will have been set forth, in all likelihood. The key points to take away from the summit are whether or not Eurobonds will be created and/or whether or not the European Central Bank is prepared to step into the bond markets indefinitely going forward. Few outcomes dictate Euro strength going forward, as any form of debt monetization would weigh on the Euro, akin to the Federal Reserve’s quantitative easing policy.

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

Five_Rate_Decisions_Ahead_ECB_Meeting_Euro-zone_Summit_Headline_Week_body_Picture_1.png, Five Rate Decisions Ahead; ECB Meeting, Euro-zone Summit Headline Week

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

--- Written by Christopher Vecchio, Currency Analyst

To contact Christopher Vecchio, e-mail cvecchio@dailyfx.com.

Follow him on Twitter at @CVecchioFX

To be added to Christopher’s e-mail distribution list, send an e-mail with subject line "Distribution List" to cvecchio@dailyfx.com.

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