Thin Docket Makes Federal Reserve Minutes Increasingly Important
This August has been quieter than times recent, in part thanks to no US downgrade and also thanks to the soothing words of European Central Bank President Mario Draghi on August 2. Despite the period of quiet, there have been some remarkable shifts in the investment landscape: Italian and (especially) Spanish bond yields are significantly lower; US economic data is rebounding; and neither major Asian concerns (the Chinese growth story; the impending Japanese debt crisis) have really developed (perhaps a testament to the aura of relative plasticity).
This coming week does not appear to be one of those weeks that could break the recent period of calm across global markets. Although two central banks, the Reserve Bank of Australia on Tuesday and the Federal Reserve on Wednesday, will release their most recent respective meetings’ minutes, nothing groundbreaking is expected. We do note that, with European leaders back from vacation and meeting this week, there is a significant risk for headlines to reemerge out of Europe with respect to Greece and Spain.
08/21 Tuesday // 01:30 GMT: AUD Reserve Bank of Australia Board August Meeting Minutes
The Reserve Bank of Australia kept its key interest rate at 3.50%, the highest among the major currencies covered by DailyFX Research. Mainly, policymakers continue to sit and wait for the effects of the 1.25% lobbed off the key rate from November through June to hit the economy. The labor market has stagnated in recent months, and growth prospects appear dimmer now in light of a slowing China besieged by various types of inflation pulling in opposite directions (thus causing various parts of the economy to fester, dampening the outlook).
Ahead of the meeting, the Credit Suisse Overnight Index Swaps were pricing in a mere 16.0% chance of a 25.0-basis point cut, with 75.0-bps priced out over the coming twelve-months. Markets are of a similar bias now, with the same swaps pricing in an 18.0% chance of a 25.0-bps cut, with 54.0-bps priced out at the time of writing. After the August meeting, the Australian Dollar spiked higher momentarily across the board but quickly retraced the move, making it a mostly net-zero sum event. We suspect mostly sideways price action, accordingly. The key pairs to watch are AUDJPY, AUDUSD, and EURAUD.
As the drum beat for more quantitative easing has gone forth from financial institutions and the main stream media, the Federal Reserve remains ardent in its fight to remain on the sidelines as long as possible. The Federal Reserve’s faith in the economy may be paying off, with Initial Jobless Claims holding lower and Nonfarm Payrolls having started to trend higher once more. But these news won’t be reflected in these minutes; instead there will just be the hope that these employment indicators would pick up.
Accordingly, what’s likely to be perceived is a mostly neutral Federal Reserve, hopeful for a better economy but willing to act if necessary, thus differing any attention to further accommodative policies further down the line in September (we think that the Jackson Hole Economic Policy Symposium will by and large be a bust, for those expecting an announcement). The US Dollar should be bolstered in the wake. The key pairs to watch are EURUSD and USDJPY.
08/23Thursday // 06:00 GMT: EUR German Gross Domestic Product (2Q F)
The German economy continues to stagger forward, putting up resilient growth figures relative to some of its Euro-zone partners (mainly Greece, Italy, and Spain) as the crisis has intensified from an economic standpoint, regardless of what sovereign yields show. Unemployment rates continue to rise in the periphery countries while output slows, leading to at best a significant recession across the region.
The final second quarter growth readings are not forecasted to show changes from their initial readings last week, though, according to a Bloomberg News survey. GDP n.s.a. on a yearly-basis is due at +0.5% (the initial expectation was +0.9%); GDP s.a. on a quarterly-basis is due at +0.3% (the initial expectation was +0.2%); and GDP w.d.a. on a quarterly-basis is due at +1.0% (the initial expectation was +1.1%). The Euro remained bolstered despite the roundly disappointing growth figures, as weaker German data could potentially force the Bundesbank to give in to broader Euro-zone demands for a bond-buying program. The key pairs to watch are EURGBP, EURJPY, and EURUSD.
08/24Friday // 08:30 GMT: GBP Gross Domestic Product (2Q P)
The British economy may not be slowing at as quick of a pace than previously thought, Friday’s follow-up second quarter growth reading will show, according to a Bloomberg News survey. The initial readings showed that the British economy contracted by rates of -0.7% quarter-over-quarter and -0.8% year-over-year. However, an upward revision in Building Output in the second quarter – from -5.2% to -3.9% - suggests that construction wasn’t as weak as first suggested. This in turn should lead to prints on the q/q and y/y improved by +0.1%, as our models show.
A stronger growth reading may already be priced in given the resilience of the British Pound in recent days, which has traded near 1.5700 against the US Dollar. As such, we think that further stronger readings will bolster the Sterling as it reduces the likelihood of more quantitative easing from the Bank of England, if only marginally. The key pairs to watch are EURGBP and GBPUSD.
08/24 Friday // 12:30 GMT: USD Durable Goods Orders (JUL)
The July Durable Goods Orders report will be released on Friday, rounding out the thin economic docket, and it should further bolster the case against more quantitative easing from the Federal Reserve. Consensus forecasts show that an increase of +2.5% is expected from +1.3% in July, representing the first gain of +2.0% or greater since February and the single-largest month-over-month improvement in terms of percentage difference (+1.2%) since the January to February period, when Durable Goods Orders went from -4.9% to + 2.0% (+6.9%).
As such and when considered alongside improving Advance Retail Sales orders from July, it is very likely that a strong print is delivered. This released is important because durable goods are goods with life spans of three years or greater tend to be costlier, making the report an indicator of medium-term confidence in consumption and employment. The key pairs to watch are CADJPY, USDJPY, and USDCAD.
Rate Hike Probabilities / Basis-Points Expectations
See the DailyFX Calendar for a full list, timetable, and consensus forecasts for upcoming economic indicators.
--- Written by Christopher Vecchio, Currency Analyst
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