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FX Week Ahead - Top 5 Events: Fed, BOE, & BOJ Meetings; Canadian Inflation; Australian Jobs Report

FX Week Ahead - Top 5 Events: Fed, BOE, & BOJ Meetings; Canadian Inflation; Australian Jobs Report

Christopher Vecchio, CFA, Senior Strategist

FX Week Ahead Overview:

  • The final ‘full’ week of the year brings about the last wave of significant event risk from around the globe, including three central bank rate decisions (Fed, BOE, & BOJ).
  • Monthly seasonality for December is favorable towards risk appetite in FX markets, with the Japanese Yen and US Dollar as the two worst performing currencies during the month.
  • The major USD-pairs have seen retail trader positioning shift enough to suggest that the recent counter-trend rebound may be running out of steam.

12/16 WEDNESDAY | 13:30 GMT | CAD Canada Inflation (CPI) Report (NOV)

The November Canadian inflation (CPI) report will be released on Wednesday, December 16 at 13:30 GMT. According to a Bloomberg News survey, further stability in price pressures is expected, with the headline inflation rate due in at 0.8% y/y from 0.9% y/y in October, while core inflation is due in unchanged at 1.0% y/y.

Given the strength seen in the Canadian economy in recent weeks (notably labor market data), Bank of Canada policymakers will likely look past any soft price pressures. Indeed, rates markets aren’t pricing in any action by the BOC for at least the next 10 months.

IG Client Sentiment Index: USD/CAD Rate Forecast (December 14, 2020) (Chart 1)

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USD/CAD: Retail trader data shows 68.04% of traders are net-long with the ratio of traders long to short at 2.13 to 1. The number of traders net-long is 3.26% higher than yesterday and 2.49% lower from last week, while the number of traders net-short is 9.94% higher than yesterday and 43.33% higher from last week.

We typically take a contrarian view to crowd sentiment, and the fact traders are net-long suggests USD/CAD prices may continue to fall.

Yet traders are less net-long than yesterday and compared with last week. Recent changes in sentiment warn that the current USD/CAD price trend may soon reverse higher despite the fact traders remain net-long.

12/16 WEDNESDAY | 19:00 GMT | USD Federal Reserve Rate Decision (DEC)

The coronavirus pandemic, the COVID-19 vaccine deployment, the US transition of power from the Trump to Biden, and fresh gridlock in Washington, D.C. leave Federal Reserve policymakers in a bind: keep calm and carry on. Fed Chair Jerome Powell has repeatedly said that the main interest rate will remain low through 2023, a sign that it will take more than a few volatile short-term developments (particularly those occurring within the confines of expectations) to alter the Fed’s path.

Fed funds futures continue to price in no change in rates through September 2021. It’s likely that adjustments to the quarterly Summary of Economic Projections (by dragging forward the economic rebound in 2021 but forecasting a dark winter the next few months) provoke the largest moves in the market around the final Fed rate decision of 2020.

IG Client Sentiment Index: EUR/USD Rate Forecast (December 14, 2020) (Chart 2)

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EUR/USD: Retail trader data shows 31.80% of traders are net-long with the ratio of traders short to long at 2.14 to 1. The number of traders net-long is 4.52% higher than yesterday and 4.37% higher from last week, while the number of traders net-short is 7.14% higher than yesterday and 6.90% lower from last week.

We typically take a contrarian view to crowd sentiment, and the fact traders are net-short suggests EUR/USD prices may continue to rise.

Positioning is more net-short than yesterday but less net-short from last week. The combination of current sentiment and recent changes gives us a further mixed EUR/USD trading bias.

12/17 THURSDAY | 00:30 GMT | AUD Australia Employment Change & Unemployment Rate (NOV)

Despite the coronavirus pandemic and a new trade bout with China, the Australian economy continues to weather the storm. According to a Bloomberg News survey, the Australian economy added +50K jobs in November following the blistering pace of +178.8K jobs in October. The unemployment rate is due to stay on hold at 7% as more participants rejoin the labor market. A strong economic backdrop continues to handcuff the Reserve Bank of Australia, which has effectively admitted that it can’t do much to stop a rapidly appreciating Australian Dollar.

IG Client Sentiment Index: AUD/USD Rate Forecast (December 14, 2020) (Chart 3)

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AUD/USD: Retail trader data shows 32.21% of traders are net-long with the ratio of traders short to long at 2.10 to 1. The number of traders net-long is 18.68% higher than yesterday and 8.72% lower from last week, while the number of traders net-short is 4.95% higher than yesterday and 5.23% higher from last week.

We typically take a contrarian view to crowd sentiment, and the fact traders are net-short suggests AUD/USD prices may continue to rise.

Positioning is less net-short than yesterday but more net-short from last week. The combination of current sentiment and recent changes gives us a further mixed AUD/USD trading bias.

12/17 THURSDAY | 12:00 GMT | GBP Bank of England Rate Decision (DEC)

For almost any other currency, the final rate decision of the year would be a meaningful event. But for the British Pound,dogged by the prospect of a no deal, hard Brexit,the Bank of England has simply been a sideshow relative to the public prowess other central banks (Fed, ECB) have enjoyed in recent months. It’s still true that as long as Brexit negotiations are in the works, the BOE won’t move on interest rates. Coupled with having just altered the Quarterly Inflation Report (QIR) in November, BOE officials are very much in ‘wait-and-see’ mode.

IG Client Sentiment Index: GBP/USD Rate Forecast (December 14, 2020) (Chart 4)

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GBP/USD: Retail trader data shows 42.04% of traders are net-long with the ratio of traders short to long at 1.38 to 1. The number of traders net-long is 5.43% higher than yesterday and 5.15% higher from last week, while the number of traders net-short is 3.41% higher than yesterday and 6.69% lower from last week.

We typically take a contrarian view to crowd sentiment, and the fact traders are net-short suggests GBP/USD prices may continue to rise.

Yet traders are less net-short than yesterday and compared with last week. Recent changes in sentiment warn that the current GBP/USD price trend may soon reverse lower despite the fact traders remain net-short.

12/18 FRIDAY | 03:00 GMT | JPY Bank of Japan Rate Decision (DEC)

Bank of Japan officials will conclude their final meeting of the year on Friday, and among the four major central banks (the other, not mentioned here, is the Swiss National Bank), the BOJ has the highest likelihood of its meeting leaving a mark on markets. BOJ officials are currently debating whether or not to extend the central bank’s corporate funding measures, which are set to expire in March 2021. It is widely anticipated that these measures will be extended by six months; the question is, will the extension come at the December 2020 BOJ meeting or the January 2021 BOJ meeting?

Kicking the can to the January 2021 BOJ meeting may not prove consequential, but it’s the type of decision that could leave some market participants uneasy heading into the illiquid holiday period. Failure to act sooner rather than later could have traders reaching for the Yen once more.

IG Client Sentiment Index: USD/JPY Rate Forecast (December 14, 2020) (Chart 5)

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USD/JPY: Retail trader data shows 67.26% of traders are net-long with the ratio of traders long to short at 2.05 to 1. The number of traders net-long is 8.35% higher than yesterday and 2.27% lower from last week, while the number of traders net-short is 7.46% higher than yesterday and 11.52% lower from last week.

We typically take a contrarian view to crowd sentiment, and the fact traders are net-long suggests USD/JPY prices may continue to fall.

Traders are further net-long than yesterday and last week, and the combination of current sentiment and recent changes gives us a stronger USD/JPY-bearish contrarian trading bias.

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

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

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