Light Docket Picks Up on Wednesday with US Retail Sales, RBNZ Meeting
Last week saw several central bank meetings that stoked volatility among their respective currencies. The Reserve Bank of Australia offered a more upbeat assessment of the economy amid improving data; the Bank of Canada soothed speculation that it would raise its key interest rates anytime in the near-future; the Bank of England refrained from more QE; and the European Central Bank, in a quizzical move, both downgraded their assessment of growth in the Euro-zone and reaffirmed their belief that growth would rebound “later in the year.”
Culminating with an exciting February US labor market on Friday, last week lived up to all of the hype it promised at the get-go. This week, however, is an entirely different story. There’s approximately half as many significant events this week compared to last, and the headline events of the week – while important – pale in comparison to those of last. Nevertheless, with a few select meetings and data points due the next several days – especially from Wednesday through Friday – volatility could be on the rise headed into the weekend.
Rate Hike Probabilities / Basis-Points Expectations
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03/13 Wednesday // 12:30 GMT: USD Advance Retail Sales (FEB)
Consumption is the most important part of the US economy, generating nearly 75% of the headline GDP figure. The best monthly insight we have into consumption trends in the US might arguably be the Advance Retail Sales report. In February, consumption rebounded, with the strengthening US consumer powering through the payroll tax increase at the start of the year. According to a Bloomberg News survey, Advance Retail Sales increased by +0.5% m/m after a +0.1% m/m increase in January. If consumption continues to rebound, it means that consumers are looking past the government’s self-imposed austerity stumbling block, meaning the economy could be poised to strengthen through 2013. I am looking for US Dollar strength following the release on a print of +0.5% m/m or greater. The key pairs to watch are EURUSD and USDJPY.
03/13 Wednesday // 20:00 GMT: NZD Reserve Bank of New Zealand Rate Decision
The Reserve Bank of New Zealand will keep its key interest rate on hold at 2.50%, where it has been since March 2011, at its policy meeting this Wednesday (technically Thursday in the Tokyo trading session). Although Governor Graeme Wheeler has said it is the central bank’s preference to “smooth the peaks” in the New Zealand Dollar, it’s clear the economy is picking up, and with inflation tempered thanks to the strong Kiwi (it is the second-best performing major in 2013, just behind the US Dollar), the RBNZ is unlikely to issue anything short of a neutral tone. In fact, it is possible – even likely – that an implicitly hawkish bias is displayed given expected upbeat commentary about the economy. I am expecting a bullish New Zealand Dollar in reaction to the policy decision. The key pairs to watch are AUDNZD and NZDUSD.
03/14 Thursday // 00:30 GMT: AUD Employment Change & Unemployment Rate (FEB)
The Australian labor market, much like the labor markets of Canada and New Zealand, homes to the other commodity currencies, is experiencing a bit of a ruffle. Although the economy added +10.4K jobs in January, the Full Time Employment shed -9.8K jobs while Part Time Employment added +20.2K; not exactly a strong trend. Similarly, the Unemployment Rate fell to 5.4%, the Participation Rate slid to 65.0% - another artificially strong figure. Thus, expectations are low headed into the February reading, as it is unlikely the economy all of the sudden has seen robust labor market growth amid the mining sector boom calming thanks to a softer Chinese growth picture. If we see similar results to last month – artificially inflated figures – Australian Dollar weakness should arise. The key pairs to watch are EURAUD and AUDUSD.
03/14 Thursday // 08:30 GMT: CHF Swiss National Bank Rate Decision
The Swiss National Bank will keep its key interest rate at 0.00% at its policy meeting this Thursday, as the recent (>six months) calm in the Euro-zone sovereign debt crisis has eased downside pressure on the EURCHF exchange rate. If the crisis has had one lingering impact on Switzerland, it is economic; a symptom that certainly isn’t reflected by financial instruments, thanks to artificially inflated confidence amid seemingly endless amounts of central bank easing. It is very likely that SNB President Thomas Jordan will keep a dovish outlook; however, with price pressures remaining weak and the economy barely growing, it would not be surprising to hear threats anew about raising the EURCHF floor. I expect a mildly bearish reaction in the Swiss Franc resulting from the policy statement. The key pairs to watch are EURCHF and USDCHF.
03/15 Friday // 12:30 GMT: USD Consumer Price Index (FEB)
“The Evans Rule” dictates that the Federal Reserve will end its QE3 program for one of two reasons: the Unemployment Rate has fallen to 6.5%; or the inflation rate has superseded +2.5% y/y. Given the Fed’s easy money program and the structurally unstable US labor market, the automatic stop on QE3 is likely to be an accelerating rate of inflation. According to a Bloomberg News survey, the US Consumer Price Index (FEB) increased by +0.5% m/m from 0.0% m/m in January, or by +1.9% y/y in January from +1.6% y/y. The core readings should be similar, at +0.2% m/m from +0.3% m/m, and at +2.0% y/y from +1.9% y/y. Although these figures aggregately remain right at or below the Fed’s +2.0% y/y target rate, they represent a step in the “end QE3” direction, which could boost the US Dollar. A faster rate of inflation is most often a result of increased aggregate demand, suggesting that consumption trends may be picking up as well. The key pairs to watch are EURUSD and USDJPY.
--- Written by Christopher Vecchio, Currency Analyst
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