FX Markets Looks to RBA & ECB Meetings, Aussie GDP, UK Elections
- US Dollar starts week at yearly lows as US economic data turns over, faith in fiscal reform passing fades away.
- With a new set of staff economic projections at their meeting this week, there is a high probability that the ECB sparks a significant move in the Euro this week.
- The British Pound has fallen back as polls have tightened over the last two weeks; the UK parliamentary elections will catalyze the next big move.
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06/06 Tuesday | 04:30 GMT | AUD Reserve Bank of Australia Rate Decision
The Reserve Bank of Australia is expected to keep rates unchanged at 1.50% on Tuesday, but rates markets are starting to ‘wake up.’ Since the last policy meeting on May 2, market-implied odds of a rate cut by the end of the year have doubled, as concerns over slipping growth have started to snowball. RBA Governor Philip Lowe has no reason to act yet, however, as data in the interim period between meetings has been volatile: strong retail sales and employment figures have been offset by weak construction and wage growth data. With the housing market cooling down – prices dropped in May for the first time in 18 months – any further data weakness that implies an inflation undershoot could provoke further discounting of a rate cut in 2017. The language in the policy statement will be key to watch for any hints of a broader dovish shift starting to materialize.
06/07 Wednesday | 01:30 GMT | AUD Gross Domestic Product (Q1’17)
Australian growth concerns have started to grow in recent weeks, and Q1’17 GDP data isn’t likely to dispel the anxiety. Year-over-year growth rates are expected to dip below +2% for the second time in the past three quarters, with the Bloomberg News consensus forecast looking for a +1.6% rate of growth, down from +2.4% y/y in Q4’16. The quarterly growth rate isn’t expected to be impressive by any means either, due in at +0.3% after +1.1% in Q4’16 and -0.5% in Q3’16. While a recession was avoided at the end of 2016 (by definition, two consecutive quarters of negative GDP readings), early signs suggest a further cooling in economic activity has occurred. In the past month, rates markets have doubled their implied probability of a rate cut by the end of the year; another disappointing growth figure could easily push odds even higher, which would sink the Australian Dollar.
06/08 Thursday | 11:45/12:30 GMT | EUR European Central Bank Rate Decision & Press Conference
The European Central Bank meets this week for one of the four policy meetings during the year at which new staff economic projections (SEPs) are produced. Like the Fed or the BOE, the ECB has fallen into the ‘transparency trap,’ whereby in an effort to be transparent to market participants, they have become all-too-predictable. Now that the French presidential elections have come and gone with much ado about nothing, market participants are seemingly inclined to think that the ECB will signal a further reduction of its extraordinary easing measures.
At the March meeting, President Mario Draghi suggested that the Governing Council was considering dropping the word “lower” from the opening salvo of their policy statement, a sign that the Euro-Zone had turned the corner from the debt crisis. Now that the window for a policy change is open again (next opening in September when the next SEPs are due), odds are in favor of the ECB taking additional steps to signal that rates are done moving lower and/or that it could further reduce the pace of its asset purchases later on this year. For the coming meeting, no rate move or change in asset purchases are expected – anything on this front would constitute a hawkish surprise.
06/08 Thursday | --:-- GMT | GBP UK Parliamentary Elections
The UK heads back to the polls for the third time in three years (general election in 2015, Brexit vote in 2016, now this general election) as Prime Minister Theresa May tries to open up a larger majority in parliament in order to strengthen her Brexit negotiating hand. While polls for the last few weeks have roundly pointed to a landslide win for the Conservatives (and thus a significant majority for the Tories in parliament), polls have started to tighten up in the past few days. While a Labour victory is still highly unlikely, it appears that markets have put a pause on the British Pound’s uptrend as the odds of a hung parliament have grown. Still, we expect the Conservatives to walk away with a meaningful majority, which should dispel some of the reasons traders have pulled Sterling away from its yearly highs versus the Australian, New Zealand, and US Dollars. A Tory win with a cushion of at least 50 seats in parliament should be a good enough result to send the British Pound back on its way towards fresh yearly highs.
06/09 Friday | 01:30 GMT | CNY Chinese Consumer Price Index
Chinese consumer prices rose by +1.2% y/y in April after setting a two-year low in inflation in February (+0.8%).Price pressures remain muted from the start of the year, when CPI was +2.5% y/y in January. Soft agricultural commodity prices have fed through into weak food inflation, which has weighed on the headline CPI reading. Similarly, with base metal prices under pressure all year long, the Producer Price Index – the cost of inputs at the factory gate, if you will – has continued to weaken as well, due in at +5.6% from 6.4% y/y. General weakness in inflation readings out of China could filter through and impact the Australian and New Zealand Dollars under the guise that weaker demand out of China will weigh on trade with the two antipodean currencies.s
Pairs to Watch: USD/CNH, AUD/USD, AUD/JPY
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--- Written by Christopher Vecchio, Senior Currency Strategist
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