Few Euro- and US Dollar-specific Releases Puts Focus on Asian, British Data
Since late-July, much of the focus in capital markets has been on two main themes: will the European Central Bank use its balance sheet to help stem the Euro-zone crisis; and will the Federal Reserve ease its monetary policy further to help a struggling US economy enraged by a disjointed fiscal program. On September 6 and then again on September 13, both questions were answered: yes and yes.
Thus, while the ECB and the Fed have set off on the dangerous path unlimited easing, risk markets have been rallying sharply and the US Dollar has fallen back quite substantially. But this week, there are no Euro-zone- or United States-specific data releases that are of the gravitas that the ECB and the Fed have had. Thus, our focus lies elsewhere: how the British economy is faring in the wake of the London Olympics; and how strong the impact of the Chinese slowdown is. We thus turn to several data releases out of Australia, New Zealand, and the United Kingdom, while keeping an eye on the Bank of Japan Rate Decision.
09/18 Tuesday // 01:30 GMT: AUD Reserve Bank of Australia September Meeting Minutes
At their September meeting, the Reserve Bank of Australia kept its main interest rate on hold at 3.50%, the highest main rate among the developed economies covered by DailyFX Research. However, especially over the past six-months, the Chinese economy has slowed sharper than anticipated, which has damaged future growth prospects for the Australian economy.
Why does this relationship matter? China is Australia’s largest trading partner, and thus, the Australian Dollar is very sensitive to the Chinese growth picture. A strong indicator for weakening Chinese growth has been the price of Iron Ore – Australia’s main commodity export – which has plummeted in recent months from $150.20/metric ton to as low as $86.20/metric ton on September 6 (-42.61%!). The evidence is clear – and our long-held view of a “hard landing” in China is being vindicated (for now).
In the policy statement accompanying the RBA’s Rate Decision, Governor Glenn Stevens issued a more optimistic tone than anticipated, which should be reflected in the Minutes. “Growth has been running close to trend, led by very large increases in capital spending in the resources sector,” he said. “Labor market data have shown moderate employment growth, even with job shedding in some industries, and the rate of unemployment has thus far remained low.” Governor Stevens also noted that domestic consumption was “quite firm” while acknowledging that the Chinese growth picture was worsening. In all, it’s unlikely that the Minutes deviate far from the policy statement. The key pairs to watch are AUDJPY and AUDUSD.
09/18 Tuesday // 08:30 GMT: GBP Consumer Price Index (AUG)
Price pressures are stable in the United Kingdom, though they remain above the Bank of England’s target rate of +2.0% year-over-year. According to a Bloomberg News survey, the Consumer Price Index rose by +0.5% in August, on a monthly-basis, after gaining +0.1% m/m in July. Over the past year, prices eased from +2.6% in July to +2.5% in August.
Inflation expectations have to be tempered right now, following Bank of England Governor Mervyn King’s statement in mid-August that traditional policy measures (i.e. rate cuts) wouldn’t be “effective” in the current environment: stimulus measures that could stoke inflation (by loosening credit and allowing capital to flow more freely through the economy) are off the table in the near-term. With the London Olympics failing to have a meaningful impact on consumption, any kickback in the acceleration of money is unlikely. A higher inflation rate could accelerate the British Pound higher. The key pairs to watch are GBPJPY and GBPUSD.
09/19Wednesday // --:-- GMT: JPY Bank of Japan Rate Decision
Typically, the Bank of Japan Rate Decision doesn’t draw much attention; the main rate has been and will remain at 0.10% for the foreseeable future (withstanding the Yen being devalued by a full decimal place – yes, it could take that much to spur inflation for a sustained period of time). But two things are working against the BoJ at present time: regional growth issues are starting to grow; and the Fed’s program will consistently hurt the US Dollar, which will weigh on the USDJPY.
But Japanese exporters can’t afford a stronger Yen, so the BoJ, with its newly-minted dovish Board, might be a bit trigger happy in the wake of reprieve in the Euro-zone crisis (just like on October 31, 2011 perhaps?) to set the Yen back to buy some time. An intervention still is a far-fetched outcome, but it remains on the radar nonetheless. The key pairs to watch are CHFJPY and USDJPY.
09/19Wednesday // 08:30 GMT: GBP Bank of England September Meeting Minutes
At its meeting on September 6, the BoE kept its key interest rate on hold at 0.50% and left its asset-purchase target at £375 billion.In mid-August, Bank of England Governor Mervyn King said that traditional policy measures (i.e. rate cuts) wouldn’t be “effective” in the current environment; hence the British Pound’s strength in recent weeks. Without this threat on the table – and no discussion of new measures that would dilute the value of the Sterling (unsterilized bond-buying resulting in a balance sheet expansion) – further strength by the British Pound could materialize in the aftermath of the release.
We do caution that the Federal Reserve – for whom the BoE has modeled some of its policies after and via-versa – defended nontraditional policy measures and went so far as to implement their own this past week. Perhaps a new program is in the works at the BoE; but the recent upturn in economic data (it is coming in better than expected) would suggest that the recession is easing and the economy is starting to pick up without more easing from the BoE. The key pairs to watch are EURGBP, GBPJPY, and GBPUSD.
09/19 Wednesday // 22:45 GMT: NZD Gross Domestic Product (2Q)
The New Zealand economy grew at a rate of +2.4% y/y in the second quarter, the same pace it grew at in the first quarter, according to a Bloomberg News survey. On a quarterly-basis, the economy expanded at a slower rate of +0.4% in the second quarter, down from the +1.1% q/q growth rate in the prior period.
The New Zealand economy is intriguing for a few reasons: its two largest trading partners, Australia and China, are very intertwined themselves so any weakness in the Australian economy is likely to be onset by weakness in the Chinese economy (this is currently materializing); and the New Zealand economy is supported mainly by agricultural trade, which means that rising food prices, so long as they’re at a contained rate, can boost growth (some evidence of this happening). For now, trade has withstood global headwinds, with the July Trade Balance showing a surplus when a deficit was expected, supported by stronger than expected Exports. Although July’s data won’t be taken into account when calculating the second quarter GDP figure, it does offer some evidence that regional trade weakness might be overestimated in the near-term. The key pairs to watch are AUDNZD, NZDJPY, and NZDUSD.
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--- Written by Christopher Vecchio, Currency Analyst
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