FX Week Ahead: FOMC Minutes, BOC Rate Decision, December US CPI
- In November 2018, the forthcoming Bank of Canada rate decision had an 85% chance of producing a 25-bps rate hike; now, rates markets are pricing in a 0% chance of a hike.
- Governor Mark Carney and the Bank of England have been sidelined for several months due to Brexit, but it wouldn’t be a surprise to hear the top central banker join the chorus of his constituents by suggesting that policy needs to remain looser for the foreseeable future.
- Following Fed Chair Jerome Powell’s policy recalibration last week, the December FOMC minutes are outdated; however, his speech this coming Thursday could provide more details for what’s next.
Join me on Mondays at 7:30 EST/12:30 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.
01/08 Tuesday | 13:30 GMT | USD Advance Goods Trade Balance (NOV)
On a month-to-month basis, trade balance figures typically go unnoticed most of the time by most market participants. Nevertheless, throughout 2018,trade figures started to garner more attention as US President Trump has escalated his trade war rhetoric. Now, with the US-China trade negotiations starting at the beginning of the three-month détente, it’s possible that US President Trump uses the trade balance release as a platform to further escalate his rhetoric – something that has happened reliably after the past few releases. We care more about what US President Trump has to say in response to the figures more than the actual November US Advanced Goods Trade Balance itself (which should see the trade deficit widen out to fresh records).
01/09 Wednesday | 15:00 GMT | CAD Bank of Canada Rate Decision
The Canadian Dollar has had a rocky few months, after gapping open higher to start October following the announcement of the revised NAFTA deal, the USMCA. But after the gap higher, the Canadian Dollar fell in nearly a straight line through the end of 2018. With the oil industry accounting for nearly 11% of the Canadian economy, the steep decline in energy prices since the start of October has had a material effect on rate expectations; weaker oil prices mean weaker growth, which precipitates less of a need for a hawkish BOC.
Accordingly, rate hike odds for the forthcoming January BOC meeting have dropped from 85% on November 2, 2018 to 0% entering this week, with a 21% chance of a 25-bps rate cut. Over the next few months, rate cut odds subside back to 0%, and as it stands, rates markets aren’t pricing in greater than a 25% chance of a rate cut or hike at any point through June 2019. We’re expecting the BOC to signal that it’s firmly in a neutral policy stance, with the implicit understanding that energy prices will determine the next policy move.
01/09 Wednesday | 15:30 GMT | GBP BOE Governor Carney Participates in Q&A
The Bank of England led by Governor Mark Carney has been rather quiet over the past few months, not a surprise when couched in the knowledge that the Brexit negotiations are ongoing. To the BOE’s credit, they have followed through on their promise to keep monetary policy on hold in the run-up to the March 2019 withdrawal deadline. But amid a sharp plunge in energy prices since the start of October, UK inflation expectations have started to slump, largely in line with declines experienced by both EU and US inflation expectations.
To this end, with both Fed and ECB policymakers signaling a willingness to ease off normalization plans to take in disinflationary trends into account, it seems like it’s just a matter of time before BOE Governor Carney joins the chorus of his contemporaries; the Q&A on Wednesday seems like an opportune time to begin verbally softening rate expectations.
01/09 Wednesday, 01/10Thursday | 19:00GMT, 17:00 GMT | USD December FOMC Meeting Minutes, USD Fed Chair Powell Speaks at Washington Economic Club
Normally, the release of the FOMC meeting minutes would garner top billing in any given week. Yearning for deeper insight into the Fed’s next move, traders parse the most recent meeting minutes to gauge the temperature of policymakers to hopefully understand what they will do next. But following Fed Chair Jerome Powell’s speech at the American Economic Association’s Annual Meeting on Friday, it seems that the December FOMC meeting minutes will be outdated at best.
Fed Chair Powell’s message was clear: future rate hikes won’t materialize as quickly as previously anticipated, even if the economic data is not bearing out concerns for a recession at present time.Fed Chair Powell said that the central bank was listening “carefully and sensitively” to the “market’s risk concerns” and it could “shift the process” of balance sheet normalization if necessary, as there was "no preset path for policy.” This is a stark change from the December FOMC meeting, where the Fed indicated that balance sheet normalization would be automatic.
Accordingly, with Fed Chair Powell’s recent comments have rendered the December FOMC meeting minutes stale, all attention this week should be on his upcoming comments at the Washington Economic Club on Thursday. Given the evolution of his comments over the past several months ((paraphrasing) October: ‘rates a long way from neutral’; November: ‘closer to neutral’; December: ‘balance sheet normalization automatic’; January: ‘policy not on preset course’), confirmation that the Fed has become more sensitive to the “market’s risk concerns” could prove beneficial for global equities and bad for the US Dollar once again.
01/11 Friday | 13:30 GMT | USD Consumer Price Index (DEC)
Incoming USpricedata will show there is disinflation evident in the US Consumer Price Index, with topline readings faltering around the Federal Reserve’s medium-term target of +2%. Headline CPI is due in at +1.9% from +2.2%, and Core CPI is due in to hold at +2.2% (y/y). No doubt, the impact of the steep decline in energy prices is just making its way through the data. We’ve previously argued that the Fed is becoming more data dependent again, and the inflation report on Friday will only underscore the belief that the Fed is due to keep policy on hold through Q1’19; no rate hike is anticipated until June 2019 at the earliest.
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--- Written by Christopher Vecchio, CFA, Senior Currency Strategist
To contact Christopher, email him at firstname.lastname@example.org
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