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Commodity Currencies in Focus with Key Australian and Chinese Data Due

Commodity Currencies in Focus with Key Australian and Chinese Data Due

Christopher Vecchio, CFA, Senior Strategist

Let’s start with the bad news: the calendar this week doesn’t have the headline attraction that last week brought forth, in the form of a Federal Reserve Rate Decision on Wednesday, a European Central Bank Rate Decision on Thursday, and the April US labor market reading on Friday. Manageable volatility was prevalent last week, particularly at the end, and while it hasn’t continued thus far on Monday, it is likely to return in the middle of this week. Which brings me to the good news: there are several Asian-Pacific-centric events on the docket that are likely to stir the underlying fundamentals of the commodity currencies, offering trading opportunities anew for scalpers and longer-term traders alike.

With two more central bank meetings this week, we once again are afforded a glance at the efforts that are “causing tremendous imbalance in the markets, where the S&P 500 presses record highs while global yields (benchmark rate of return) are just off record lows,” as Chief Currency Strategist John Kicklighter notes.Certainly, the Reserve Bank of Australia policy meeting on Tuesday and the Bank of England policy meeting on Thursday are less-high profile than the Fed and the ECB, but they remain significant nonetheless.

Rate Hike Probabilities / Basis-Points Expectations

Commodity_Currencies_in_Focus_with_Key_Australian_and_Chinese_Data_Due_body_Picture_1.png, Commodity Currencies in Focus with Key Australian and Chinese Data Due

See the DailyFX Calendar for a full list, timetable, and consensus forecasts for upcoming economic indicators.

05/07 Tuesday // 04:30 GMT: AUD Reserve Bank of Australia Rate Decision

Rate cut expectations picked up in April and the few days in May thus far, with the Credit Suisse Overnight Index Swaps index suggesting a 52% chance of a 25-bps cut on Tuesday. However, of the 29 economists polled by Bloomberg News, only eight believe that 25-bps rate cut to 2.75% is likely (the other 21 are forecasting a hold at 3.00%). Given the fact that major Australian and Chinese data has only recently began to sour (although the story of slowing Chinese growth has been building for some time), I believe that we won’t see a rate cut – yet. I do expect a rate cut in the coming months, perhaps as soon as the June meeting – although that still is heavily reliant on a continued downturn in significant data. We’ll have a better gauge of where the RBA stands, I think, on Thursday, after the April labor market report is released. On a hold, the Australian Dollar is likely to have a bullish reaction, given the slight edge in market bias towards a rate cut (52% chance).

CONSENSUS: 3.00% key rate (unch)

PRIOR: 3.00% key rate (unch)

The key pairs to watch are AUDUSD and EURAUD.

05/09 Thursday // 01:30 GMT: AUD Employment Change & Unemployment Rate (APR)

Australian labor market reports the past few months have been nothing short of erratic, with a range of -36.1K to +74.0K in the past two months alone. The 3-month jobs average has whipsawed from +28.3K in February, the highest trailing average since the 3-month period ending in March 2012, to +17.0K in March. What’s most concerning aside from the volatility in the headline figure is the recent drop in the participation rate, from 65.3% in February to 65.1% in March. How does this all add up? The drop in the participation rate should create an artificial drop in the unemployment rate thanks to the labor force shrinking, and yet that didn’t happen; weakness in the Australian jobs market was quite prevalent. With recent Australian inflation data sliding lower and Chinese growth data cooling, pressure looks like it will be here to stay – only a soft reading to the upside should be expected – there is room for disappointment here.

CONSENSUS: +11.0K; 5.6%

PRIOR: -36.1K; 5.6%

The key pairs to watch are AUDUSD and EURAUD.

05/09 Thursday // 01:30 GMT: CNY Consumer Price Index (APR)

Inflation is a strong gauge for growth trends (given the implied connection to aggregate demand), and recently, price pressures in China have eased – disinflation is evident. The narrative is for weaker growth throughout 2013, as the country undergoes the structural changes of an emerging market economy to a developed economy. Recent chatter from Chinese leaders suggests that the 2014 growth target could be revised lower to +7.0% annualized, which would represent a significant blow to the commodity currencies over the medium-term. A slight rebound is forecasted, although it may not be enough to alleviate growth fears affecting the Australian and New Zealand Dollars.

CONSENSUS: +2.3% y/y

PRIOR: +2.1% y/y

The key pairs to watch are AUDUSD and AUDJPY.

05/09 Friday // 11:00 GMT: GBP Bank of England Rate Decision

We’re officially in the gravitational pull of Mark Carney taking over the governorship at the Bank of England in July, meaning that a state of paralysis has descended over the British economy. Although the 1Q’13 GDP report came in better than expected, there is still significant concern that a triple dip recession could arise midyear if fiscal policy remains tilted towards austerity. In terms of the meeting itself, Governor King will probably continue his call for additional QE, with one or two of his cohorts joining him, while the majority of the Monetary Policy Committee opting for a hold. Like the past two BoE meetings, a hold on the headline could result in a small rally in the British Pound.

CONSENSUS: 0.50% key rate (unch); APT on hold at £375B

PRIOR: 0.50% key rate (unch); APT on hold at £375B

The key pairs to watch are EURGBP and GBPUSD.

05/10 Friday // 12:30 GMT: CAD Employment Change & Unemployment Rate (APR)

Like the Australian economy, the Canadian economy has experienced significant volatility in the headline jobs change figure, as well the unemployment rate. There may be some collateral damage from the slowdown in trade out of the United States, which recently saw a smaller trade deficit because of lower trade volumes overall. If the US is experiencing a ‘slow spring,’ a fear that has been partially allayed thanks to the April US labor market report on Friday, then the Canadian economy is facing a significant headwind. Some 97% of energy exports head to the US from Canada, making the US “China” to Canada’s “Australia.” A small bump in jobs growth is expected, and given the beat in the US reading, it is possible that the Canadian Dollar finds renewed attention.

CONSENSUS: +15.0K; 7.2%

PRIOR: -54.5K; 7.2%

The key pairs to watch are AUDCAD and USDCAD.

--- Written by Christopher Vecchio, Currency Analyst

To contact Christopher Vecchio, e-mail

Follow him on Twitter at @CVecchioFX

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