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FX Markets Look to RBA, BOE, and ECB After US Labor Day

FX Markets Look to RBA, BOE, and ECB After US Labor Day

Christopher Vecchio, CFA, Senior Strategist

Talking Points:

- Rate decisions from the RBA on Tuesday, the BOC on Wednesday, and the ECB on Thursday should keep the fires of volatility stoked throughout the middle of the week.

- Incoming US ISM figures important, but less so now that the August US Nonfarm Payrolls report has already been released.

- The newswire is a prime source of risk: geopolitical tensions remain exceptionally higher after North Korea’s nuclear test over the weekend.

Join me on Mondays at 7:30 EDT/11:30 GMT for the FX Week Ahead webinar, where we discuss top event risk over the coming days and strategies for trading FX markets around the events listed below.

09/05 Tuesday | 04:30 GMT | AUD Reserve Bank of Australia Rate Decision

The RBA’s meeting this week is expected to go off without much fanfare. Overnight index swaps are pricing in exactly a 1% chance of a rate move at the coming meeting: 1% chance of a cut; 0% chance of a hike. In recent weeks, economic data has started to fall below expectations, with the Citi Economic Surprise Index for Australia dropping from +62.2 on June 15 to +35.8 today. At the last RBA meeting, policy officials expressed concern that the Australian Dollar itself was too strong and could interfere with their ability to achieve their policy goals. With both headline CPI and GDP running below +2%, there is little reason to suspect anything will transpire at all – rates markets have this one right, don’t expect a surprise.

Pairs to Watch: AUD/JPY, AUD/NZD, AUD/USD

09/06 Wednesday | 14:00 GMT | CAD Bank of Canada Rate Decision

The Canadian Dollar has been on an absolute tear since June, and much of it has to do with pricing around potential BOC policy decisions. In early-June, there was less than a 10% chance of a rate hike for the rest of 2017. By mid-July, not only had one rate hike actually been priced-in – and the BOC did hike – but a second hike was being priced-in for the end of the year. While the market-implied odds of a BOC hike this week are just over 50%, the odds of another 25-bps hike by December are 83%. As such, even if the BOC does not hike this week, expectations are high that they will maintain their generally hawkish tone, and continue to prep markets for further policy tightening in the months ahead.

Pairs to Watch: CAD/JPY, EUR/CAD, USD/CAD, Crude Oil

09/06 Wednesday | 14:00 GMT | USD ISM Non-Manufacturing/Services Composite (AUG)

The August USD ISM Non-Manufacturing/Services headline reading is expected at 55.9 versus a prior reading of 53.9. The US Dollar should show heightened sensitivity to this report given the economy’s tendency to follow the performance of the service sector, which accounts for approximately two-thirds of jobs in the United States. This data will carry less weight this week, however, as it is typically used as a contemporaneous indicator for trends in US Nonfarm Payrolls data; the August report was released already last Friday.

Pairs to Watch: DXY Index, EUR/USD, USD/JPY, Gold

09/07 Thursday | 11:45 GMT | EUR European Central Bank Rate Decision

The European Central Bank policy meeting this coming Thursday is one of the four meetings each year that new staff economic projections (SEPs) are produced, which raises the stakes considerably for the week ahead. Yet unlike the past few policy meetings, where even the releases of the SEPs felt more like placeholders than anything, the coming rate decision this Thursday could have material consequences that span beyond the next few days.

The ongoing improvement in the Euro-Zone means that is likely to balance out his short-term concern over Euro strength with medium-term hopes that growth conditions will continue to improve. Ultimately, this may mean that the ECB decides to forego announcing the next phase of its QE taper at its meeting this week and punt on that decision until the next round of SEPs in December.

Read the full preview: What Matters Most for the ECB Meeting this Week is the Euro Itself

Pairs to Watch: EUR/GBP, EUR/JPY, EUR/USD

09/08 Friday | 12:30 GMT | CAD Change in Net-Employment and Unemployment Rate (AUG)

The Canadian labor market’s rebound is expected to have continued in August, with employment increasing by +10K and the unemployment rate holding at 6.3%. Assuming that the BOC doesn’t raise rates on Wednesday, this should be another print for the Canadian Dollar that increases the likelihood that the BOC raises rates again by the end of the year. With markets currently pricing in a 83% chance of a hike by December, there is still further room – not much – for traders to price in tighter policy from the BOC.

Pairs to Watch: CAD/JPY, EUR/CAD, USD/CAD, Crude Oil

Read more: Weekly Trading Forecast: ECB, RBA and BOC Meetings in Focus

--- Written by Christopher Vecchio, CFA, Senior Currency Strategist

To contact Christopher, email him at cvecchio@dailyfx.com.

Follow him in the DailyFX Real Time News feed and Twitter at @CVecchioFX.

To receive this analyst’s reports, sign up for his distribution list.

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

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