This is an exceptionally busy week in the foreign exchange market and today’s quiet start provides investors with the opportunity to assess and position for some of this month’s most anticipated events – NFP, RBA, BoE Quarterly Report, UK PMIs and CAD Employment. The lack of consistency in the dollar’s performance today reflects market uncertainty but as the week progresses, the year-end trend for the majors will become increasingly clear. Non-farm payrolls is the marquee event but this is not just a big week for the U.S. dollar. We also have monetary policy announcements from Australia, the U.K. along with manufacturing or employment reports from most of the major economies. Therefore the market’s appetite for U.S. dollars won’t dictate overall currency trends in the front of the week even if today’s rise in the manufacturing ISM index helped USD/JPY hold onto its recent gains. No U.S. economic reports are scheduled for release on Tuesday but Janet Yellen will be speaking before the House Financial Services Committee. Fed speak will be just as important as data this week.
For the next 24 hours the focus will be AUD and NZD. There is a small chance that the Reserve Bank of Australia could lower rates but we think they will pass. The argument for a rate cut centers around lower inflation, recent discounting by retailers, pay freezes for steelworkers, weaker import activity from China and the decision by Westpac to increase borrowing costs. Yet China’s recent stimulus and mixed Australian data gives the RBA the flexibility to wait. Although last night’s Australian manufacturing PMI report showed a significant slowdown in activity, the labor market, consumer and business confidence remains steady. There have even been improvements in housing activity and market indices. Back in October the RBA expressed confidence in the economy despite a downgrade by the IMF and investors interpreted this to mean that they were done lowering rates this year. The market is currently pricing in only a 42% chance of a rate cut tonight but while the RBA may hold rates steady, there’s reason to be dovish and cautious comments could send the Australian dollar sharply lower.
Between the Global Dairy Auction and a quarterly labor report, there’s a lot going on for the New Zealand dollar. Dairy prices fell for the first time in 2 months at the last auction and if they decline again, it could crush the New Zealand dollar especially after the RBNZ expressed reservations about the dairy price recovery. The New Zealand dollar was the day’s worst performing currency and we know from the behavior of AUD that the move had nothing to do with mixed Chinese data. We don’t expect tomorrow’s employment report to help the currency because the decline in the employment component of the PMI business and service sector indices points to weaker labor market conditions. In fact economists are looking for the unemployment rate to rise to 6% from 5.9%.
Besides the Non-Farm Payrolls report and the RBA rate decision, the Bank of England monetary policy announcement and more importantly the BoE Quarterly Inflation Report will be a big focus this week. The BoE is not expected to raise interest rates but the minutes are now released alongside the rate decision and there’s a small but realistic possibility that one additional monetary policy committee member will join Ian McCafferty in voting for an immediate rate rise. The Quarterly Report should be positive especially after today’s sharp rise in the PMI manufacturing index. Although inflation remains low, retail sales was very strong in September. Even a slightly hawkish outcome to Thursday’s events will be enough to drive sterling above 1.55 but before the rate decision and quarterly report, we have the U.K. PMI composite and service sector index scheduled for release – two reports that also have a significant impact on sterling.
The most important event risk for euro this week will be the speeches from ECB President Draghi. On Tuesday he speaks at the opening of the European Cultural Days, on Wednesday he speaks at a banking conference and on Thursday at a school in Milan. We believe that on at least one of these occasions he’ll take the opportunity to reinforce the central bank’s dovishness and the possibility of additional easing.
UsdCad bounced today on the back of lower oil prices. In recent weeks crude has been extremely volatile with the latest decline triggered by softer Chinese manufacturing data. Until the release of Canadian data, the loonie will take its cue from oil, which is trading widely between $42 and $50 a barrel. Canada’s trade balance, IVEY PMI and employment reports are scheduled for release this week and we believe that all 3 reports will highlight the vulnerabilities of Canada’s economy, reinforcing the Bank of Canada’s dovish bias.
The big story out of Japan is the $12 Billion Japan Post IPO. This is the largest IPO for Japan in almost 3 decades and the biggest global IPO of the year. The IPO is part of the government’s goal to boost investment demand and the receptionhas been strong. 80% of the sales will be to domestic investors with the remaining 20% to foreign institutional investors. $2.4 billion in foreign investor demand is not a small penny and the transaction flow could provide a short-term boost to the yen.