Talking Points:
- Following in the footsteps of the RBNZ last week, the RBA is likely to keep rates on hold and take on a dovish tone over in its policy statement.
- The FOMC’s June meeting minutes will underscore policymakers’ collective belief that additional tightening steps are necessary in 2018; currently, rates markets are pricing in less than a 50% chance of two more hikes this year.
- The Canadian labor market report may have greater significance in terms of upcoming central bank decisions than the US Nonfarm Payrolls report will.
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.
07/03 Tuesday | 04:30 GMT | AUD Reserve Bank of Australia Rate Decision
The Reserve Bank of Australia is expected to keep its main overnight rate on hold at 1.50% when it meets for its July policy meeting. The decision comes independent of new growth and inflation forecasts being released, but regardless of new projections, the RBA wouldn’t be in a position to raise rates anyhow. With household debt at all-time highs and financial market conditions start to tighten, the RBA seems content on staying pat for the foreseeable future: there is less than a 1% chance of a rate hike at Tuesday’s meeting, and less than a 15% chance of a hike by December 2018 – cut in half from when the RBA last met. Like the RBNZ, expect the RBA to embrace a dovish outlook in the near-term.
Pairs to Watch: AUD/JPY, AUD/NZD, AUD/USD
07/05 Thursday | 12:30 GMT | USD ISM Non-Manufacturing/Services Composite (JUN)
The ISM Non-Manufacturing/Services Composite due out on Thursday covers economic activity for roughly two-thirds of the world’s largest economy, making it far more important than the Manufacturing Composite due out earlier in the week on Monday. At an expected reading of 58.2 from 58.6, there is an expectation that some growth momentum has been lost as the second quarter ran down to a close. Nevertheless, such a reading would still be well within growth territory, suggesting that as far as trends go, this one will be steady. Using a 10-year rolling model, the ADP report and the ISM Services report can account for 88% of the changes in the NFP figure (R^2 = 0.88); given the expectations, traders will look to Thursday’s ISM Services report to confirm what should be another sturdy US labor market report on Friday.
Pairs to Watch: EUR/USD, USD/JPY, DXY Index, Gold
07/05 Thursday | 18:00 GMT | USD FOMC Meeting Minutes (JUN)
The Federal Reserve’s June policy meeting yielded a rate hike and a new Summary of Economic Projections, with the combined impact of the two being a stronger US Dollar in their collective wake. For all of 2017, and much of 2018 thus far, policy officials were outlining plans to raise rates around three times in this year. But the new projections and the policy statement released at the June FOMC meeting suggest that officials are gearing up for a faster pace of tightening, with the median dot plot now pricing in two more 25-bps rate hikes in 2018. As far as the US Dollar goes, the only dovish blemish on an otherwise hawkish set of minute may be concerns over the fiscal situation with respect to trade – although that would hardly be new news to anyone.
Pairs to Watch: EUR/USD, USD/JPY, DXY Index, Gold
07/06 Friday | 12:30 GMT | CAD Net-Change in Employment and Unemployment Rate (JUN)
The Canadian labor market has seen its momentum cool in 2018 after a strong end to 2017. Jobs have been lost in three of the first five months of the year, with the economy losing -9.8K jobs on average per month in 2018. The simple fact of the matter is that uncertainty surrounding the future of NAFTA has impacted the economy in many ways, from hiring plans at companies to monetary policy at the Bank of Canada. That said, consensus forecasts are calling for a rebound in the Canadian labor market in June, with the unemployment rate set to hold at 5.8% as the economy gained +20K jobs. However, traders are likely to be highly sensitive to the figure as the last two months produced job losses (when gains were expected), and the implication for the July Bank of Canada meeting couldn’t be clearer (overnight index swaps are pricing in an 83% chance of a rate hike this month).
Pairs to Watch: CAD/JPY, EUR/CAD, USD/CAD
07/06 Friday | 12:30 GMT | USD Change in Nonfarm Payrolls and Unemployment Rate (JUN)
The main issue for the US Dollar with respect to theJune US Nonfarm Payrolls report is whether or not the US labor market will see the unemployment rate hold below 4% at multi-decade lows. Consensus forecasts are looking for the unemployment rate to stay at 3.8% as the economy added +195K jobs in June. The labor market has been a pillar of strength for the US economy in recent years, with Fed officials convinced that downward pressure on the unemployment rate would ultimately lead to faster inflation vis-à-vis wages. Now that higher inflation – both expected and actual – is being realized, the US Nonfarm Payrolls report no longer has the cachet that is once did. Accordingly, the risk the US labor market brings to the table is asymmetric for the US Dollar: a strong report merely confirms what is known and doesn’t impact Fed policy; a weak report could sow confusion and discord over the near-term path of interest rates.
According to the Atlanta Fed Jobs Growth Calculator, the economy only needs +107K jobs growth per month over the next 12-months in order to sustain said unemployment rate at its current 3.8% level.
Pairs to Watch: EUR/USD, USD/JPY, DXY Index, Gold
Read more: Third Quarter Forecasts for Dollar, Euro, Oil, Equities and More
FX TRADING RESOURCES
Whether you are a new or experienced trader, DailyFX has multiple resources available to help you: an indicator for monitoring trader sentiment; quarterly trading forecasts; analytical and educational webinars held daily; trading guides to help you improve trading performance, and even one for those who are new to FX trading.
--- 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.
