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With Downgrades in Rear View Mirror, Markets Eye Chinese GDP

With Downgrades in Rear View Mirror, Markets Eye Chinese GDP

2012-01-16 08:00:00
Christopher Vecchio, CFA, Senior Strategist

Finally, some clarity. After weeks of speculation that Standard and Poor’s would strip the European continent of any and all of its ‘AAA’ ratings, Friday’s ratings actions come as a welcomed development in the European debt saga. The big news, of course, is that German did not lose its prized AAA rating. Although France saw its credit rating cut to AA+ (many expected a two-notch cut to AA), the fact remains that the ratings change was not as bad as expected, leading to a softer negative reaction amid the news on Friday.

Now that market participants are more informed about the investment landscape ahead, the next week provides an interesting starting point for a bull run across asset classes. Still, there are some headwinds to this assessment and most of the impediments to another strong week by higher yielding currencies rest heavily on global macroeconomic developments.

In terms of scheduled event risk this week, the most notable event on the calendar has to be the Chinese growth reading due early on Tuesday. The data will have the most profound effect on Australian Dollar crosses, which have been under pressure over the past few months following weaker Chinese data and two rate cuts by the Reserve Bank of Australia. Staying with the Aussie, Australian labor market data is due mid-week that will further exacerbate volatility. Overall, not much key data from the Euro-zone or the United States is due, so global growth comes into focus in the week ahead.

CNY Chinese Real GDP (YoY) (4Q): January 17 – 02:00 GMT

Arguably the most important release on the week, Chinese growth data from the fourth quarter is due early in the Asian session on Tuesday. Growth in the world’s largest country is forecasted to have declined to a rate of 8.7 percent in the fourth quarter, down from 9.1 percent in the third quarter. Over the course of 2012, Chinese growth has been steadily slowing, forcing the People’s Bank of China to ease monetary policy through their reserve requirement ratio for banks. If the growth figure is in line with the forecast or better than expected, a rally away from the U.S. Dollar and into the commodity currencies, most notably the Australian Dollar, is expected. Any downside is likely limited by expectations of further easing by the PBOC and broader loosening monetary conditions globally, as the European Central Bank continues to intervene in the market and the Federal Reserve mulls another round of easing itself.

CAD Bank of Canada Rate Decision: January 17 – 14:00 GMT

At its meeting on December 6, the Bank of Canada voted to maintain its key interest rate at 1.00 percent, a rate that has been in place since September 8, 2010. Likewise, with economic conditions both domestically and internationally warranting no change in policy, the BOC is forecasted to maintain its key interest rate at 1.00 percent on Tuesday. The Canadian Dollar has been resilient thus far in 2012 as market participants remain cautiously bullish amid new measures taken by central bankers to boost confidence. Elsewhere, given the correlation the Loonie has held with oil over the past several years, tensions in the Middle East have been supportive of a strong Loonie as well. Not much is expected from the meeting, though the BOC’s growth forecasts are of note.

NZD New Zealand Consumer Prices Index (YoY) (4Q): January 18 – 21:45 GMT

Considering the data is released on a quarterly basis, the New Zealand consumer price index reading for the fourth quarter is arguably the most important gauge of inflation due this week. The release, due shortly before Asian markets open on Wednesday, is forecasted to show that price pressures held at 0.4 percent on a quarterly-basis, while contracting to 2.6 percent from 4.6 percent on a year-over-year basis. If price pressures are indeed coming off at such an incredible rate, the Reserve Bank of New Zealand is likely to put any rate hikes on hold for the time being, especially considering global macroeconomic conditions. This release offers the best chance this week to derail the Kiwi’s strong start in 2012.

AUD Australian Employment Change (DEC): January 19 – 00:30 GMT

The Australian economy has faced some headwinds in recent weeks, though Thursday’s data could offer a reprieve to the recent trend. In December, the Australian economy is forecasted to have added 10.0K jobs, after seeing 6.3K jobs leave the economy in November. Forecasts for Australian labor market growth haven’t been accurate of recent, with the actual print exceeding or underperforming the forecast by a few thousand jobs each of the past several prints. In the medium-term, while a strong print could boost the Aussie, it remains to be seen what the Reserve Bank of Australia does, which cut rates twice at the end of the year in light of the fact that there is not a policy meeting in December.

USD United States Consumer Price Index (YoY) (DEC): January 19 – 13:30 GMT

According to a Bloomberg News survey, economists forecast the U.S. consumer price index to moderate, with the median estimate calling for a slight 0.1 percent bump in December, on a monthly basis. The year-over-year figure is expected to drop to 3.0 percent from 3.4 percent in November. The core figure, which excludes the more volatile food and energy components, is forecasted to hold at 2.2 percent on a yearly-basis. Considering this figure has been subdued relative to the headline figure, Federal Reserve Chairman Ben Bernanke has suggested that inflation remains “transitory,” leaving open the door to further quantitative easing.

The objective of the Federal Reserve’s quantitative easing stimulus program was to achieve a target inflation rate of about 2 percent. If price pressures continue to remain above this rate, this could provide evidence for hawkish Federal Reserve officials to resist calls for further easing and instead continue solely with ‘Operation Twist.’ Join a DailyFX analyst for live coverage of event!

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

With_Downgrades_in_Rear_View_Mirror_Markets_Eye_Chinese_GDP_body_Picture_1.png, With Downgrades in Rear View Mirror, Markets Eye Chinese GDP

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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