Amid ongoing geopolitical risk, this Friday’s US non-farm payrolls (NFP) report will be the week’s key data point, but the latest policy meetings for five major central banks are also on the docket.
The US dollar (USD) closed last week higher against all major currencies amid ongoing Syria tensions and mixed US economic data, which served to highlight the ongoing challenges facing the US economic recovery.
The last unofficial week of summer was supposed to be a quiet one, but the risk of a military strike on Syria and thin liquidity in the financial markets ended up causing wild swings in currencies, equities, and commodities. Tensions in the Middle East will continue to dominate headlines, but for the financial community, there's a lot more than geopolitical risk to worry about this coming week.
US traders will be off on Monday for the Labor Day holiday, but on Tuesday, the market will wake up from the summer slumber and start moving once again, and there's no shortage of volatility-inducing events throughout the week.
Five central banks have monetary policy meetings, and on Friday, the US non-farm payrolls (NFP) report is due for release. While the NFP data is expected to be the primary FX event risk for the week ahead, there's a laundry list of other top-tier reports on the economic calendar.
This month's NFP release is particularly crucial because it will help the Federal Reserve decide if and by how much asset purchases should be tapered in September. Recent economic data has been mixed, leading many investors to wonder whether the central bank is acting prematurely, yet the singular focus on the labor market suggests the Fed will not deviate from its plans to taper in either September or December.
We believe the Fed is ready to act this month as long as job growth exceeds 125k-150k. Based on the low level of weekly jobless claims in August, we expect job growth to exceed the prior month's 162k print. Bear in mind, however, that a number of US economic reports will be released before Friday's NFP number including manufacturing and non-manufacturing ISM, the trade balance, ADP employment change, and the Fed’s Beige Book report, all of which will help shape the market's expectations for NFP.
While the market's appetite for dollars could determine how currencies trade throughout the week, the fact that five major central banks also have monetary policy announcements means that country-specific factors could also drive currency flows. In other words, the outlook for payrolls should be the overriding theme for the coming week, but other central bank rate decisions could trigger unexpected volatility in the FX markets.
The #2 Event Risk This Week
The euro (EUR) dropped to fresh two-week lows against the US dollar on Friday. The move began in Europe when European traders ignored strong Eurozone confidence numbers and sold the euro on month-end rebalancing and softer German retail sales, which plunged 1.4% in the month of July.
See also: EUR/USD Battles Month-End Malaise
After non-farm payrolls, this week’s second most significant event risk is the European Central Bank (ECB) rate decision on Thursday. The ECB is not expected to change interest rates next week, but recent uncertainty and unevenness of Eurozone data could lead to continued caution from the central bank.
Given the most recent rate cut, and now, higher oil prices, consumer and business spending could come under fire, and as such, we expect the ECB to remain dovish, a stance that could hurt the EURUSD, which has had a very difficult time breaking the 1.34 level. Unless the ECB is surprisingly optimistic (and it has no real reason to be), we don't expect this level to be breached in the coming week.
Aside from the ECB meeting, revisions to GDP data, as well as final Eurozone PMI numbers, German factory orders, industrial production, and trade balance reports are all scheduled for release.
Markets Hoping for More Clues About Carney
Despite stronger housing market numbers, the British pound (GBP) continued to trade lower against the US dollar. Mortgage approvals increased more than expected, while house price growth slowed only slightly.
It was a quiet week in general for the pound, which ground slowly lower on risk aversion. The Bank of England (BoE) has a monetary policy meeting on Thursday as well, although we expect no major policy surprises or reaction in the currency.
Having just heard from BoE Governor Mark Carney last week, we know that the central bank is leaving the door open to additional easing, but recognizes the improvement in data. For this reason, we believe that next week's PMI and industrial production numbers could have a much more significant impact on sterling than the BoE rate decision. If the data shows that the UK recovery is gaining momentum, we could see renewed demand for the British pound, as a large part of the currency's resilience has to do with the upside surprises in data.
We are, however, interested in seeing whether a detailed statement is released after the BoE rate decision. BoE Governor Carney chose to provide one in his first monetary policy meeting, but comments in his second statement were much shorter, and since Carney is just beginning his tenure with the BoE, the market is still trying to understand his rhythm.
The Bank of Canada’s Big Worry
The Canadian dollar (CAD) extended its losses against the greenback as weaker economic data boosts the risks of dovish comments from the central bank this week. Canada released its June and Q2 GDP numbers on Friday, and slower growth could prompt the Bank of Canada (BoC) to be more cautious.
This latest GDP report will reinforce the BoC’s desire to keep rates steady and could even trigger dovish comments. The 1.06 figure remains stiff resistance for USDCAD, and significantly dovish comments from the BoC would be needed to drive the pair above this level.
Meanwhile, we feel that an increase in private sector credit won't stop the Reserve Bank of Australia (RBA) from expressing concerns about the economic outlook. After cutting interest rates earlier this month, the central bank still maintains a dovish bias, and understandably so considering there are many signs that the recovery in Australia is losing momentum. If the trend doesn't change soon, the RBA could cut interest rates again, which is why we will be watching this week's Australian PMI, retail sales, and Q2 GDP numbers very closely.
Japanese Yen to Take Its Cues from Elsewhere
The Japanese yen (JPY) traded lower against most major currencies despite decent economic data. The latest manufacturing and consumer reports have eased concerns about a deeper slowdown in Japan. Industrial production rebounded by a healthy 3.2%, while the PMI manufacturing index increased to 52.2 form 50.7. These improvements, along with the rise in consumer prices, the drop in the jobless rate, and rebound in household spending are all signs that Japan's economy is moving in the right direction. The 0.7% increase in core CPI also suggests that Japan is slowly beating deflation.
Like many other countries around the world, Japan also has a monetary policy meeting this week, but it will probably be the least interesting of the lot. Economic improvements mean that the Bank of Japan (BoJ) won’t be all that eager to increase stimulus because the central bank firmly believes that the current programs need more time to affect the economy.
As such, we do not anticipate any major changes in the central bank's monthly report, and for the most part, the yen crosses will move on the market's appetite for the US dollar, euro, British pound, and Australian dollar (AUD) since more significant event risks are expected.
By Kathy Lien of BK Asset Management