FX Week Ahead Overview:
- It may prove difficult for the New Zealand Dollar to sustain gains even as the RBNZ hikes rates, considering that a 25-bps rate hike is already discounted at every meeting through the end of 2023.
- Evidence that the US economy is growing rapidly alongside elevated inflation pressures could stir speculation that an accelerated Fed taper may soon arrive.
- Signs that Germany is facing less conducive economic conditions, thanks in part to the recent wave of COVID-19 infections, could weigh on the Euro further.
For the full week ahead, please visit the DailyFX Economic Calendar.
11/23 WEDNESDAY | 01:00 GMT | NZD Reserve Bank of New Zealand Rate Decision
Rates markets are pricing in the most aggressive rate hike cycle by a major central bank in the post-Global Financial Crisis era over the next year for the RBNZ. The 4Q’21 New Zealand inflation expectations data earlier this week bolstered the narrative, with the 2-year inflation expectation jumping to +2.96% from +2.27%; the 1-year inflation expectation surged to an 11-year high of +3.7%. In the wake of the data, rates markets are on the verge of pricing in 50-bps worth of hikes when the RBNZ meets this week.
In early-November, New Zealand OIS were implying a 140% chance of a hike at the November meeting (100% chance of a 25-bps rate hike; 40% chance of a 50-bps rate hike). After the New Zealand inflation expectations figures, there is now a 142% chance of a hike (100% chance of a 25-bps rate hike; 42% chance of a 50-bps rate hike). If the RBNZ only delivers a 25-bps rate hike, however, this could represent a disappointment relative to expectations, leading to weakness in NZD-crosses. It may be the case that RBNZ rate hike pricing is an albatross around the Kiwi’s neck for the foreseeable future.
11/23 WEDNESDAY | 09:00 GMT | EUR German Ifo Business Climate Index (NOV)
A recent surge in COVID-19 infections may be crimping the near-term outlook for economic growth in the Eurozone’s largest economy, Germany. Coupled with November German and Eurozone PMI readings set to be released on Tuesday, it appears that a slowdown has taken root in recent months. Expected in at 96.6, down from the 97.7 reading in October, the German Ifo Business Climate index may be another headwind that keeps the Euro pointed lower in the days ahead.
11/23 WEDNESDAY | 13:30 GMT | USD Durable Goods Orders (OCT)
The US economy revolves around consumption trends, given that approximately 70% of GDP is accounted for by the spending habits of businesses and consumers. As such, the durable goods orders reportmake for an important barometer of the US economy. Durable goods are items with lifespans of three-years or longer – from refrigerators and washing machines to cars and airplanes. These items typically require greater capital investment or financing to secure, meaning that traders can use the report as a proxy for business’ and consumers’ financial confidence and health.
As supply chain concerns are starting to abate, and US consumers remaining in strong financial shape despite rising inflation pressures, the October US durable goods orders report is expected to show a +0.2% m/m gain after contracting by -0.4% m/m in September. Released alongside the October US goods trade balance report and weekly jobless claims figures, the US data made public on Wednesday morning ahead of the US cash equity open promise to inject volatility into FX markets and US Treasuries prior to the holiday.
11/23 WEDNESDAY | 15:00 GMT | USD Personal Income & Spending, Core PCE (OCT)
Another trio of US data releases on Wednesday morning are set to bring about another wave of volatility to market after the US cash equity open – all of which speak to the health of the US consumer. Consistent with other data releases on the day, the October US personal spending rate is forecasted to increased by +1% m/m after a +0.6% m/m gain in September. One month after federal unemployment insurance benefits ended, October US personal income is due to increase by +0.2% m/m after dropping by -1% m/m in September.
But the most important data release of the day may come in the form of the October US core personal consumption expenditure (PCE) index – the Federal Reserve’s preferred gauge of inflation. According to a Bloomberg News survey, US core PCE is due in at +0.4% m/m from +0.2% m/m and +4.1% y/y and +3.6% y/y. It’s possible that the core PCE readings beat to the upside following the hot October US consumer price index (CPI) report, which showed the fastest pace of inflation since 1990.
Due to be updated after the data releases on Wednesday, the Atlanta Fed GDPNow’s 4Q’21 growth tracker is pointing to a robust +8.2% annualized real growth rate.
11/23 WEDNESDAY | 19:00 GMT | USD FOMC Meeting Minutes (NOV)
The November Fed meeting produced the announcement that tapering would begin immediately, with the pace of asset purchases set to be reduced by $15B/month in both November and December. But parsing Fed Chair Jerome Powell’s commentary from the press conference, it does not appear that tapering is on a preset course; unlike the 2018 rate hike cycle, this time ‘autopilot’ is not engaged.
As a result, any clues from Fed officials that there is an appetite to increase the rate of tapering come 2022 – say, to $20B/month – in the face of sustained inflation pressures may serve as a catalyst to help lift short-end US Treasury yields, and thus the US Dollar (via the DXY Index), ahead of markets being closed on Thursday for Thanksgiving and the half-day on Friday.
--- Written by Christopher Vecchio, CFA, Senior Strategist
