Talking Points:
- As we cross through mid-September, the economic calendar thins out and there are fewer ‘high’ rated events this week than there were in either of the previous two.
- The September FOMC meeting on Wednesday represents the high watermark for significant event risk this week, but after hurricanes battered the southeastern United States in recent weeks, there is reason to believe the Fed may be more cautious about tightening monetary policy.
- The newswire remains a prime source of risk for the Japanese Yen and US Dollar: North Korea’s provocative missile tests won’t be ending any time soon as it seems acceptance as a nuclear power.
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.
09/20 Wednesday | 18:00 GMT | USD Federal Reserve Rate Decision
Amid the lackluster US data performance and slump in medium-term US inflation expectations, markets are pricing a 0% chance of a rate move this week, and the odds of a Fed rate hike by the end of the year have eroded steadily. On July 3, the implied probability of a 25-bps rate hike by December 2017 was 56%; today it is 47%, having risen off of the 22% low on September 7. The timing of the next hike, per Fed funds futures contracts, has been pointing to March 2018, although in recent months this has started to oscillate to further out on the calendar; late-Q1’18 or early-Q2’18 is now priced-in.
Should the Federal Reserve’s September policy statement reveal the beginning of the normalization process and a reaffirmation of the desire to raise rates by the end of the year, perhaps market participants will be forced to confront the divergence between what the Fed is saying it wants to do and the much more dovish interpretation that the market currently holds. If so, the US Dollar may just finally find a reprieve from its punishing 2017 downtrend.
Pairs to Watch: EUR/USD, USD/JPY, DXY Index, Gold
09/21 Thursday | --:-- GMT | JPY Bank of Japan Rate Decision
The monthly Bank of Japan Monetary Policy Statement is expected to see rates remain at -0.10% with the 10-year JGB yield target unchanged around 0%. In order to boost inflation to a stable, target, level of 2%, the BOJ controls short-term and long-term interest rates via market intervention, while the central bank has also committed itself to increasing the monetary base until inflation hits target. At the end of the month, the central bank announces which government bond issues it will buy in the next month, with approximate purchase amounts and purchase dates.
Consumer price inflation in Japan rose 0.4% in July 2017, in-line with market expectations but still well-below the BOJ’s +2% target. It’s also worth noting that as of the end of August 2017, the BOJ owned approximately 45% of all outstanding Japanese government debt. Expect the BOJ to retain the mantle of ‘most dovish G7 central bank’ for the foreseeable future.
Pairs to Watch: AUD/JPY, EUR/JPY, USD/JPY, Gold
09/22 Friday | 12:30 GMT | CAD Consumer Price Index (AUG)
Canadian inflation is expected to have remained below the central bank’s medium-term target of +2.0% in August, but an improvement is due. The Canadian CPI report on Friday is expected to produce a reading of +1.5% from +1.2% y/y in July. The BOC has judged that the economy has fully adjusted to weaker energy prices and that thanks to a tight labor market, more inflation is going to materialize. As a result, the BOC has raised rates by 25-bps at each of its past two meetings.
The prospect of inflationary pressures moving closer to the BOC’s +2% medium-term goal should reinforce hawkish inclinations at the BOC in the near-term. Expectations for tighter policy moving forward been reflected in overnight index swaps, which are pricing an 73% chance of a third rate hike by the end of the year. Only a print lower on inflation this week could deflate these odds a bit, weighing on the Canadian Dollar.
Pairs to Watch: CAD/JPY, EUR/CAD, USD/CAD, Crude Oil
Read more: Euro Turns to CPI, PMI Data Ahead of German Elections
--- Written by Christopher Vecchio, CFA, Senior Currency Strategist
To contact Christopher, email him at cvecchio@dailyfx.com.
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