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European and Japanese Inflation Data in Focus; Canada Waits on BoC, GDP

European and Japanese Inflation Data in Focus; Canada Waits on BoC, GDP

Christopher Vecchio, CFA, Senior Strategist

Bank holidays in the United Kingdom and the United States on Monday have dampened trading conditions to start the week, but overall, the last week of May should be exciting nevertheless once full liquidity returns. Of note, we’re watching risk trends in Japanese financial instruments develop, given the sell-off of JGBs and the Nikkei at the end of last week, culminating in the USDJPY’s worst single day performance in over two years.

This week, the growing theme that everyone should be focused on is the issue of deflation – or in most cases, disinflation – that’s been plaguing the world’s developed economies. German, broader Euro-zone, and Japanese inflation gauges are due this week, and given the intense focus on inflation in these regions (Germany and the Euro-zone are afraid of it; Japan can’t get enough of it), volatility around these data releases is highly likely.

North America isn’t to be forgotten, with the government reading of consumer sentiment in the US due out on Tuesday, with the first revision to the 1Q’13 US GDP report on Thursday. Straddling these US data releases are two important Canadian events, the first being the Bank of Canada Rate Decision on Wednesday, and finally the 1Q’13 and March GDP reports due out on Friday (Canada reports m/m, y/y, and annualized once per quarter).

Rate Hike Probabilities / Basis-Points Expectations

European_and_Japanese_Inflation_Data_in_Focus_Canada_Waits_on_BoC_GDP_body_Picture_1.png, European and Japanese Inflation Data in Focus; Canada Waits on BoC, GDP

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

05/28Tuesday // 14:00 GMT: USD Consumer Confidence (MAY)

Consumers are the backbone of the US economy, and with consumption trends improving amid falling price pressures, consumers have indeed shown signs of improving confidence. While this may or may not be tied to the recent rise in the stock market – there’s a strong sense among the public that stocks have little to do with the real economy – there certainly has been a spillover effect. Case and point: QE3 has carried risk markets higher despite the increasingly strong headwind of the January payroll tax hike and March budget sequestration. With stocks remaining elevated and labor market data steadily improving, another reading above 70.0 in the Conference Board’s Consumer Confidence gauge should carry the US Dollar higher.


PRIOR: 68.1

The key pairs to watch are EURUSD and USDJPY.

05/29Wednesday // 12:00 GMT: German Consumer Price Index (MAY P)

While both German and broader Euro-zone inflation data are due this week, we’re more focused on the former given the significance of the German economy to the general European policymaking process. Now that Germany is starting to experience the economic drag onset by weaker trade with peripheral partners, there’s been a greater leniency among the more vocal critics of easy monetary and fiscal policies, suggesting that if the data turns, so too might a key institution’s stance – namely, the ECB. A bounce in the May reading is expected, but because it will remain below the ECB’s +2% yearly inflation target, speculation could arise that the ECB will be forced to implement other dovish policies, which could send the EUR lower.

CONSENSUS: +1.3% y/y

PRIOR: +1.2% y/y

The key pairs to watch are EURJPY and EURUSD.

05/29 Thursday // 14:00 GMT: CAD Bank of Canada Rate Decision

The Bank of Canada Rate Decision is particularly interesting because the BoC has been the only central bank over the past several years that has suggested its next move away from the global financial crisis will be a rate hike, one which has been previously been thought to potentially take place some point later this year. However, with disinflation setting in across North America, and the Canadian housing market flashing serious warning signs that a bubble may be deflating, the BoC is unlikely to issue hawkish commentary, and instead, further entrench itself into recent rhetoric that it believes rates remain appropriate for the time being. While a hold shouldn’t be a surprise, a continued sway towards a more dovish tone will weigh on the Canadian Dollar.


PRIOR: 1.00%

The key pairs to watch are CADJPY and USDCAD.

05/30 Thursday // 23:30 GMT: JPY National Consumer Price Index (APR)

Is the rest of the world turning Japanese? I really think so – at least in the sense that deflation/disinflation pressures are building across the globe’s developed economies, a problem that Japan has been facing for the past two-plus decades. Now that ‘Abenomics’ is in full gear with the implementation of the Bank of Japan’s sweeping easing policies implemented on April 4, economic data over the next few weeks is increasingly crucial as it will be a measuring stick as to whether or not more easing is necessary. So far, so good, according to forecasts compiled by Bloomberg News: the April inflation reading is expected to showed that deflation slowed, an obvious result of the new Japanese policies. Generally speaking, higher inflation equates to a stronger currency, given the rate implications.

CONSENSUS: -0.7% y/y

PRIOR: -0.9% y/y

The key pairs to watch are AUDJPY and USDJPY.

05/31 Friday // 12:30 GMT: CAD Gross Domestic Product (1Q & MAR)

The Canadian economy is experienced a strong 1Q’13, just like its neighbor to the south, with forecasts calling for a near-quadrupling of the 4Q’12 annualized growth rate. However, the uptick may be short-lived, given the fact that the yearly March rate is expected to slow from the February reading, a sign that the slowdown seen in Europe and the United States may be having an impact on trade. (Similarly, as US energy independence accelerates, Canada could suffer amid weaker oil exports.) If there’s a deviation away from the forecast, it will likely be to the downside, given the woes the Canadian housing market is currently going through.

CONSENSUS: +2.3% annualized, +1.5 y/y

PRIOR: +0.6% annualized, +1.7% y/y

The key pairs to watch are AUDCAD and USDCAD.

--- Written by Christopher Vecchio, Currency Analyst

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DailyFX provides forex news and technical analysis on the trends that influence the global currency markets.