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FX Week Ahead - Top 5 Events: US Retail Sales; Canada Inflation; BOE & Fed Rate Decisions; Australia Jobs

FX Week Ahead - Top 5 Events: US Retail Sales; Canada Inflation; BOE & Fed Rate Decisions; Australia Jobs

Christopher Vecchio, CFA, Senior Strategist
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FX Week Ahead Overview:

  • The economic calendar is supersaturated as we turn through the ides of March, giving plenty of room for global bond yields to remain volatile.
  • Much like the BOC and ECB, the Federal Reserve (Wednesday) and the Bank of England (BOE) are likely to talk their way around the recent rise in global bond yields, shrugging them off as evidence of improving optimism.
  • Recent changes in retail trader positioning suggest that several pairs could break in favor of fresh US Dollar weakness.
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For the full week ahead, please visit the DailyFX Economic Calendar.

03/16 TUESDAY | 12:30 GMT | USD Retail Sales (FEB)

Consumption is the most important part of the US economy, generating around 70% of the headline GDP figure. The best monthly insight we have into consumption trends in the US might arguably be the ‘retail sales advance’ report. According to a Bloomberg News survey, after the surge at the start of the year, consumption appears to have taken a setback in the second month of 2021.Headline US retail sales is expected to contract by -0.5% m/m from the gain of +5.3% (m/m) in January.

Even if the retail sales report drags down US growth estimates for 1Q’21 (per the Atlanta Fed GDPNow and NY Fed Nowcast growth trackers), it may be looked past now that the Biden stimulus plan has been passed into law and most American consumers are in the process of receiving stimulus checks.

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03/17 WEDNESDAY | 12:30 GMT | CAD Inflation Rate (CPI) (FEB)

The FebruaryCanada inflation rate (CPI) report will be released on Wednesday, and according to a Bloomberg News survey, upside pressure is starting to appear in price pressures. The headline inflation rate is due in at +1.3% from +1%(y/y) in January, while core inflation is due in sharply higher, at +2% from +1.6% (y/y).

Following the impressive February Canada jobs report which saw the unemployment rate plummet from 9.4% in January to 8.2% in February, there are substantial evidence that the Canadian economy is gathering pace heading into the ‘base effect’ area around the start of the pandemic in 2020, which will likely curate an economic environment pressuring the Bank of Canada to reconsider its aggressive stimulus efforts. In turn, higher inflation figures may help the Loonie continue its bull run.

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IG Client Sentiment Index: USD/CAD Rate Forecast (March 12, 2021) (Chart 1)

FX Week Ahead - Top 5 Events: US Retail Sales; Canada Inflation; BOE & Fed Rate Decisions; Australia Jobs

USD/CAD: Retail trader data shows 78.61% of traders are net-long with the ratio of traders long to short at 3.67 to 1. The number of traders net-long is 12.93% higher than yesterday and 18.55% higher from last week, while the number of traders net-short is 38.30% lower than yesterday and 22.83% lower 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.

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

03/17 WEDNESDAY |18:00 GMT | USD Federal Reserve Rate Decision & Press Conference

After weeks of Fed officials downplaying inflation fears and suggesting that rising US Treasury yields reflect economic optimism, interest rate expectations remain firmly anchored: Fed funds futures are pricing in a 95% chance of no change in Fed rates through January 2022. The bottom line: don’t expect the Fed to do anything along the interest rate channel anytime soon.

FEDERAL RESERVE INTEREST RATE EXPECTATIONS (March 12, 2021) (TABLE 1)

FX Week Ahead - Top 5 Events: US Retail Sales; Canada Inflation; BOE & Fed Rate Decisions; Australia Jobs

Instead, the FOMC may opt for a simpler solution to prevent a further backing up of yields: extending the supplementary leverage ratio (SLR) requirement for banks, which have been exempted from counting Treasuries and reserves against their capital as a percentage of total assets for the past year during the pandemic.

If the SLR requirement rolls off, US banks would likely be forced to increase their capital holdings and/or reduce their Treasury holdings, and a wave of Treasury selling could push yields higher again.Simply announcing an extension to the SLR requirement at the March 17 FOMC meeting may remove a potential factor for more volatility in US yields in the near-term.

03/18 THURSDAY | 00:30 GMT | AUD Employment Change & Unemployment Rate (FEB)

According to a Bloomberg News survey, the Australian economy added +30K jobs in February, effectively matching the +29.1K pace in January. Beneath the hood, full-time jobs increased by +59K while part-time jobs dropped by -29.8K. If recent trends continue, the Australian labor will remain on the healing path, with more jobs, but more full-time than part-time jobs added, which increases Australia’s economic potential henceforth.

The unemployment rate is due to tick lower to 6.3% from 6.4%, a modest improvement but an improvement nevertheless. It still holds that a strong economic backdrop continues to handcuff the Reserve Bank of Australia, which has effectively admitted that it can’t do much to stop an appreciating Australian Dollar.

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IG Client Sentiment Index: AUD/USD Rate Forecast (March 12, 2021) (Chart 2)

FX Week Ahead - Top 5 Events: US Retail Sales; Canada Inflation; BOE & Fed Rate Decisions; Australia Jobs

AUD/USD: Retail trader data shows 48.98% of traders are net-long with the ratio of traders short to long at 1.04 to 1. The number of traders net-long is 6.36% lower than yesterday and 4.10% lower from last week, while the number of traders net-short is 2.90% lower than yesterday and 13.42% 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.

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

03/18 THURSDAY | 12:00 GMT | GBP Bank of England Rate Decision

The British Pound is on firm footing ahead of the March BOE meeting, insofar as backwards-looking dour economic data is being ignored in favor of forward-looking optimistic vaccination rates. After all, Brexit is resolved, and the UK leads every major developed country in vaccination rates, setting it up to return to pre-pandemic economic activity faster than others.

And while the BOE has previously raised the issue of negative interest rates, no BOE ‘Kremlinologists’ are expecting a shift to negative rates. This meeting may come and go with much ado about nothing, beyond the (now typical song and dance) discussion around rising global bond yields, which this strategist is almost certain the BOE will paint as a sign of “economic optimism,” no different than the BOE, ECB, or Fed in the prior days.

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IG Client Sentiment Index: GBP/USD Rate Forecast (March 12, 2021) (Chart 3)

FX Week Ahead - Top 5 Events: US Retail Sales; Canada Inflation; BOE & Fed Rate Decisions; Australia Jobs

GBP/USD: Retail trader data shows 52.18% of traders are net-long with the ratio of traders long to short at 1.09 to 1. The number of traders net-long is 10.21% lower than yesterday and 2.73% lower from last week, while the number of traders net-short is 8.48% lower than yesterday and 5.14% higher from last week.

We typically take a contrarian view to crowd sentiment, and the fact traders are net-long suggests GBP/USD 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 GBP/USD price trend may soon reverse higher despite the fact traders remain net-long.

--- 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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