Four Central Bank Meetings Headline Week Alongside US NFPs
August was quite the unexciting month in FX markets, with ranges tight amid substantially lower rates of participation across the global (using volumes on major equity markets as a proxy for broad market participation). The first week of September promises to stir excitement once more, with key data due out over the next five-days from all corners of the globe.
Although there are four central bank meetings (the Reserve Bank of Australia on Tuesday; the Bank of Canada on Wednesday; and the Bank of England and the European Central Bank on Thursday), there are three main themes this week: Australian data as a proxy to what appears to be a rapidly weakening China; whether or not the European Central Bank introduces its ‘whatever it takes [to save the Euro]’ strategy; and if the August labor market reading for the United States will prompt more easing from the Federal Reserve.
09/04 Tuesday // 01:30 GMT: AUD Reserve Bank of Australia Rate Decision
The Reserve Bank of Australia is expected to keep its key rate on hold at 3.50% on Tuesday, according to a Bloomberg News survey. In fact, none of the 24 economists surveyed predict there will be a change in rates. Interest rate expectations are plummeting for the Australian Dollar, with the Credit Suisse Overnight Index Swaps showing 100.0-basis points priced out over the Australian Dollar the next 12-months. Nevertheless, swaps are only suggesting a small 15.0% change of a 25.0-bps rate cut. Given the recent outflow of data out of China (with the August PMI Manufacturing showing contraction), there is little chance of hawkish commentary; we expect the Reserve Bank of Australia to issue a dovish position. The key pairs to watch are AUDJPY and AUDUSD.
09/05 Wednesday // 01:30 GMT: AUD Gross Domestic Product (2Q)
With China as its largest two-way trading partner, concerns have risen over the strength of the Australian economy. Consensus estimates suggest that Australian growth may have topped in the first quarter, with second quarter readings due to show a slowdown in the rate of expansion. Growth on a quarterly-basis expanded at a rate of +0.8% from +1.3% in the prior quarter. On a yearly-basis, the growth rate was +3.7% in the second quarter from +4.3% in the first quarter, according to a Bloomberg News survey. With Chinese data coming in weaker than expected on a number of key metrics, and perhaps with base metal prices falling as a better indicator of growth rates (as a proxy for demand), there is a distinct possibility that there is a downward revision in the first quarter figures as well as a miss on the second quarter figures. The key pairs to watch are AUDJPY and AUDUSD.
09/06Thursday // 11:00 GMT: GBP Bank of England Rate Decision
The Bank of England is unexpected to make any major policy moves this week, with the Asset Purchase Target to remain on hold at £375 billion and the key interest rate on hold at 0.50%, where it has been since March 2009 (coincidentally, the major low seen across many global equity markets). But given recent price action out of the British Pound – incredibly resilient – there’s certainly the implication that the monetary policy on which the British Pound rests is firming up. On August 8, Governor Mervyn King went so far as to suggest that “[A key interest rate cut] would damage some financial institutions and it would therefore in all probability have an element at least of being counterproductive, which is precisely why we haven’t cut bank rate…If that situation were to change, and it is possible that the impact on the net interest margins of smaller banks and building societies might diminish, then that could be something that could be contemplated.” Further confirmation of the Bank of England’s seemingly new policy to keep rates on hold could lift the Pound. The key pairs to watch are EURGBP, EURJPY, and EURUSD.
09/06Thursday // 11:45 GMT: EUR European Central Bank Rate Decision
Alongside the US Change in Nonfarm Payrolls on Friday, this is the most important event of the week. The European Central Bank will cut its key rate to a new historic low of 0.50% from 0.75% on Thursday, according to a Bloomberg News survey. But swaps traders aren’t expecting this to be the case: according to the Credit Suisse Overnight Index Swaps, there is only a 8.1% of a 25.0-bps rate cut. Similarly, only 5.5-bps are being priced out of the Euro over the next 12-months.
Rumor has it that President Mario Draghi will unveil a program to buy securities with maturities in the three-year range, but this will not be the panacea market participants are looking for – Thursday may be ugly. Only an unlimited program to cap yields will satiate investors’ demands, as history as shown via two longer-term refinancing operations in December 2011 and February 2012, which only bought a few months worth of time before panic resumed. Given the hubris exhibited by President Draghi in late-July and early-August, anything but an unlimited plan will be up to snuff this week, and without that, whatever else the European Central Bank chooses to do may prove to be meaningless for confidence. The key pairs to watch are EURJPY and EURUSD.
09/07 Friday // 12:30 GMT: USD Change in Nonfarm Payrolls and Unemployment Rate (AUG)
Alongside the European Central Bank Rate Decision, this is the most important event of the week. How important is labor market data to the Federal Reserve? In his key address at the Jackson Hole Economic Policy Symposium, Federal Reserve Chairman Ben Bernanke argued that not only has quantitative easing helped the US economy, that withstanding a further improvement in the US employment situation, more easing could deployed. Hence, the importance of Friday’s Nonfarm Payrolls report for August. According to a Bloomberg News Survey, +127K jobs were added last month, while +163K jobs were added in July. Similarly, the Unemployment Rate is expected to remain on hold at 8.3%. The decline in jobs growth is discouraging, but the four-week average rose to +95.5K in August from +90.5K in July, suggesting that the recent slowdown may be over. If this is a weak figure, the US Dollar will be hit very hard. The key pairs to watch are EURUSD and uSDJPY.
Rate Hike Probabilities / Basis-Points Expectations
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--- Written by Christopher Vecchio, Currency Analyst
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