FX Markets Turn to RBA, BOC, and US NFP in First Full Week of December
- The first full week of a new month brings its usual trappings: central bank rate decisions, PMIs, and labor market data.
- It seems highly unlikely that the upcoming US jobs report can do anything to deter the Federal Reserve from hiking rates next week (100% probability according to Fed funds futures).
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12/05 Tuesday | 03:30 GMT | AUD Reserve Bank of Australia Rate Decision
The Reserve Bank of Australia is expected to keep rates unchanged at 1.50% on Tuesday as the country’s growth outlook hasn’t evolved that much in recent weeks. The labor market continues to improve gradually, and it is expected that the unemployment rate will fall further in the coming years. However, with real wage growth continuing to struggle, Australian consumers face some challenges ahead. Accordingly, the RBA is unlikely to want, or need, to change its policy stance in the near future. Rates markets are not pricing in any shift in policy until December 2018 (93% chance of a rate hike; November 2018 hike odds are currently 48%).
12/05 Tuesday | 15:00 GMT | USD ISM Non-Manufacturing/Services Composite (NOV)
The November USD ISM Non-Manufacturing/Services headline reading is expected at 59 versus a prior reading of 60.1. The relatively similar headline reading expected this Wednesday is indicative of currently favorable business conditions that are easing off the strong burst in sentiment that has been so prevalent in US markets. 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. Look for the data, in conjunction with the ADP Employment report, to shape expectations for Friday’s Nonfarm Payrolls report.
12/06 Wednesday | 00:30 GMT | AUD Gross Domestic Product (3Q)
Australian growth concerns have lingered throughout 2017, and Q3’17 GDP data may go some ways to relieve some of the anxiety. Year-over-year growth rates are expected to rebound sharply, with the Bloomberg News consensus forecast looking for a +3.0% rate of growth, up from +1.8% in Q2’17 (y/y). The quarterly growth rate is expected to remain solid at +0.7% after +0.8% in Q2’17.Given how pessimistic market participants have been on the Australian Dollar in the second half of this year, underscored by rates markets not pricing in any policy change until December 2018, it would seem that there is asymmetric risk for a stronger reaction by the Australian Dollar: a soft GDP reading won’t do much to change rates markets pricing; but a strong GDP reading might.
12/06 Wednesday | 15:00 GMT | CAD Bank of Canada Rate Decision
The Canadian Dollar has had a volatile 2017, 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. Eventually, this transpired in September with markets pricing a third hike in for 2017. This hawkish perception proved to be overdone, with the market-implied odds of a BOC hike this week now below 20%. Looking down the calendar, March 2018 comes in as the most likely period for the next rate hike (75% chance). As such, even if the BOC does not hike this week, expectations are high that they will continue to prep markets for further policy tightening in the months ahead.
12/08 Friday | 13:30 GMT | USD Change in Nonfarm Payrolls & Unemployment Rate (NOV)
The key issue surrounding the November US Nonfarm Payrolls report is whether or not the US labor market will remain strong enough to justify a more aggressive pace of Fed tightening in 2018. Current expectations for the data are modest, with the Unemployment Rate expected to hold at 4.1%, and the headline jobs figure to come in at +199K. The trend of +200K jobs growth per month has recently been a psychological level for markets, but Fed leaders and centrists (the Goldilocks of the Fed; not too hawkish or too dovish) tend have another number in mind.
In October 2015, San Fran Fed President John Williams wrote in a research note that he believed growth of +100K jobs per month was enough to sustain the growth in the labor force and maintain the current unemployment rate. In December 2015, Chair Janet Yellen reiterated this same view. And, in late-February 2016, she noted that the economy can maintain its current unemployment rate by producing between 75K and 125K jobs per month. According to the Atlanta Fed Jobs Growth Calculator, the economy only needs +110K jobs growth per month over the next 12-months in order to sustain said unemployment rate at its current 4.1% level.
--- Written by Christopher Vecchio, CFA, Senior Currency Strategist
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