You should be trading currencies next week because excluding the U.S. Presidential election on November 8th, the next 5 days are jam packed with major event risks. With 4 monetary policy announcements (from US, Japan, Australia and UK), 4 employment reports (US, Canada, Germany and New Zealand), PMIs and countless other key releases on the calendar, these will be some of the busiest days for FX traders in the month of November. Big moves are assured and we could even see new multi-month / year highs or lows set in the process. GBP/USD is not far from its 30 year low, USD/JPY could hit a new 3 month high, while USD/CAD and USD/CHF could reach fresh 7 or 8 month highs. This coming week’s central bank rate decisions in November are not as important as the ones in December because no changes in monetary policy is expected but investors will be listening closely for their tone / bias and guidance as they will set expectations for next month’s potential moves. While it may be hard to whittle down to the most important releases (because there are so many of them), the primary events will be the Federal Reserve meeting, the Bank of England’s Quarterly Inflation Report and U.S. non-farm payrolls.
Barring the unexpected news that the FBI has re-opened its investigation into Hillary Clinton’s emails, this past week has been a great one for the U.S. dollar with Friday’s stronger than expected third quarter GDP report adding fuel to the market’s optimism. We doubt that this investigation will have any impact on the election a week and half from now but political headlines can add to the volatility expected this coming week. The dollar ended the week higher against most of the major currencies. USD/JPY broke above 105, USD/CAD breached 1.34 and GBP/USD came close to breaking the 1.2100 handle. It is almost hard to believe that USD/JPY was trading near 100 a month ago but thanks to the Federal Reserve’s persistent commitment to raising interest rates this year even in the face of softening labor and spending data, U.S. yields and the U.S. dollar rose strongly over the past month. Data in the past week was mostly better with growth accelerating, manufacturing activity improving, new home sales rising, and the trade deficit narrowing but a slow recovery in the labor market and upcoming election is making consumers nervous. The Federal Reserve isn’t going to change its message next week so the ISM non-manufacturing and non-farm payrolls report will be more important as they will either ease or harden the market’s doubt about December tightening. Fed fund futures are pricing in a nearly 75% chance of a rate hike at the end of the year but if less than 175K jobs were created in October, putting the average near 165K, those expectations will fade as it will cast doubt on the central bank’s rosy outlook. With that in mind, since we are anticipating hawkishness from the Fed and the FOMC meeting is 2 days before NFP, we expect the dollar to trade strongly in the front of the week. The Bank of Japan also has a monetary policy meeting and while no changes are expected, weak growth necessitates more easing and investors are eager to find out if they will act in December or surprise with a November move.
Sterling took a beating this past week and the prospect of further losses hinges on the Bank of England. In many ways next week is more important for the British pound than the U.S. dollar because the latest UK PMIs and Quarterly Inflation Report will be released. Immediately after Brexit, the PMIs plunged, then it recovered in the months that followed and now there is some fear that we will begin to see weakness again. Most of this past week’s economic reports like consumer prices, employment and GDP surprised to the upside but retail sales was weak. Yet sterling came under heavy selling pressure on growing Brexit fears. The headline on Friday that Northern Ireland would not challenge Brexit caused a flurry of activity but is not particularly surprising. The big question next week is whether the BoE will lower its economic forecasts and signal plans to ease. When Governor Mark Carney spoke this past week, he drove sterling higher when he said there were limits to monetary policy. GBP is at risk of a short squeeze so if the Quarterly Report echoes this sentiment by emphasizing the improvements in the economy and downplaying Brexit, we could see a sharp rise in the currency. We don’t think that is likely because Carney has been very vocal about the risks of Brexit. Both the manufacturing and services PMI will be released before the Quarterly report and they will help set expectations for the more important release.
Compared to other major currencies, the data impacting the euro next week is less significant which means the path of the currency will most likely be determined by the market’s appetite for U.S. dollars. Having fallen to a 7 month low this past week, EUR/USD appears to have bottomed. We could see 1.10 but further gains should be limited as we expect dollar bulls to remain in control at the start of the week. On Friday, we learned that consumer prices in Germany grew at its fastest pace in 2 years, which is a function of the weaker euro and higher energy prices. This adds to the string of positive surprises that we seen all week from the Eurozone. Monday’s third quarter Eurozone GDP report and Wednesday’s German labor data are the key numbers to watch. Job creation was the strongest in 5 years according to the PMIs and another healthy release could keep the currency supported into FOMC. Like sterling, short positions are near extreme levels, which makes the currency vulnerable to a squeeze in the coming days / weeks.
Of the 3 commodity currencies the weakest one this past week was the Canadian dollar. Oil prices peaked and data surprised to the downside with retail sales falling and consumer price growth missing expectations. The Bank of Canada left interest rates unchanged but cut their growth and inflation forecasts, adding pressure on the currency. While August GDP, Canadian employment and the IVEY PMI reports are scheduled for release this week they will take a back seat to all other major global releases. The Australian dollar on the other hand is likely to march to its own beat with a Reserve Bank of Australia meeting, Australian PMIs and retail sales on the calendar. After last week’s stronger CPI report, we believe that the RBA’s neutral monetary policy bias will lend support to the currency. While AUD/USD may be pressured by positive USD flows, the Australian dollar could see stronger gains versus the euro, Swiss Franc, Yen and sterling. AUD has shrugged off rising iron ore and gold prices but we believe these rallies will return as drivers for the currency in the coming week. Meanwhile Chinese PMIs will affect both AUD and NZD. The New Zealand dollar has been surprisingly resilient in the face of deteriorating trade data. New Zealand’s employment report is scheduled for release next week and according to the PMIs labor market conditions weakened in the third quarter.