3 Interest Rate Decisions: Which Will Have Biggest Surprise?
Kathy Lien | Jul 30, 2018 01:55AM ET
Between 3 central-bank meetings, nonfarm payrolls, PMIs, ISMs, GDP, CPI and a long list of other market-moving events, we can be assured of big moves in the forex market. In fact, many major currency pairs have been trading in tight ranges and are now prime for a breakout. While everyone will be watching the US dollar because of FOMC and NFP, sterling and the Japanese yen could actually be the biggest movers. The Fed is not expected to change monetary policy but the Bank of England could raise interest rates and the Bank of Japan could tweak its policies. The biggest surprise could come from the Japanese but with the BoE’s Quarterly Inflation Report due to this week, the Brits may also have something up their sleeves. The Fed, on the other hand, will stick to script by highlighting the strength of the US economy and the need for tighter policy in September. The greenback saw very little movement over the past week. The Canadian dollar and Japanese yen were the best performers while the euro and Swiss franc were the worst. The Australian and New Zealand dollars experienced modest losses.
Data Review
- Existing Home Sales -0.6% vs. 0.2% Expected
- House Price Index 0.2% vs 0.3% Expected
- Manufacturing PMI 55.5 vs 55.1 Expected
- Services PMI 56.2 vs 56.3 Expected
- Composite PMI 55.9 vs 56.2 Prior
- New Home Sales -5.3% vs -3.1% Expected
- Advance Goods Trade Balance $-68.3b vs $-67.0b Expected
- Wholesale Inventories 0.0% vs 0.3% Expected
- Durable Goods Orders 1.0% vs 3.0% Expected
- Durable Ex. Transportation 0.4% vs 0.5% Expected
- GDP Annualized 4.1% vs 4.2% Expected
- Personal Consumption 4.0% vs 3.0% Expected
- Core PCE 2.0% vs 2.2% Expected
- University of Michigan Sentiment 97.9 vs 97.1 Expected
- University of Michigan Current Conditions 114.4 vs 116.5 Prior
- University of Michigan Expectations 87.3 vs 86.3 Prior
Data Preview
- BOJ Rate Policy - Potential for a hawkish adjustment from the Bank of Japan
- FOMC Rate Decision - No changes expected from Fed but they are likely to reinforce expectations for tightening
- Nonfarm Payrolls - Job growth should continue to be strong but nonfarm payrolls are volatile and best traded reactively
- Personal Income, Personal Spending and PCE Deflator - Potential for downside surprise given weaker average hourly earnings and retail sales
- Chicago PMI and Consumer Confidence - Potential for downside surprise given weaker Empire State survey and confidence declined according to the University of Michigan’s consumer sentiment index
- ADP Employment Change - ADP is hard to predict but can be market moving as a leading indicator for NFP
- ISM Manufacturing - Will have to see how Chicago PMI fares as weaker Empire is offset by stronger Philly Fed index
- ISM Non-Manufacturing Composite - Will have to see how ISM manufacturing fares
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Key Levels
- Support 110.00
- Resistance 112.00
This could be a good week for the US dollar. To start, there’s plenty of market-moving US data. While ISM, personal income, personal spending and consumer confidence numbers are scheduled for release the main events will be the Federal Reserve’s monetary policy announcement and nonfarm payrolls. It is difficult to say whether FOMC or NFP will have a bigger impact on the dollar but the only thing that matters is whether they reinforce the case for tightening and we think they will. As there will be no press conference or updated economic projections and the Fed is not expected to change policy, investors will be looking to the FOMC for continued optimism and hawkishness. Fed fund futures are currently pricing in an 80% chance of tightening in September and according to the table below, not much has changed in the US economy since June. Labor market conditions deteriorated slightly but job growth remains strong, retail sales increased, inflation is on the rise and housing activity weakened. Both the manufacturing and service sectors reported stronger growth so we don’t think that dollar bulls will be disappointed this week. The FOMC statement will most likely highlight the underlying strength of the economy, the ongoing improvements and uptick in inflation. Economists are looking for job growth to slow slightly but if the unemployment rate declines and wage growth accelerates, the Fed would be happy to tighten.
Does this mean that its time to buy USD/JPY? Not so fast. While the greenback could rise against other major currencies, the Japanese Yen could also benefit from Bank of Japan policy change. The BoJ has been guilty of stealth tapering for the past few months and there’s talk that this could translate into something official as they struggle to control their yield curve. Prior to the FOMC announcement, the BoJ will decide if its time to change their policy language and if there’s even a small tweak, the Yen could soar taking USD/JPY lower pre-FOMC. A change could even be significant enough to keep the pair under pressure through FOMC as the Fed isn’t expected to deliver any surprises and adjustments by the BoJ would be monumental. The speculation has ranged from an increase in the target rate to a change in their emphasis from Nikkei ETFs to Topix ETF, ceasing the purchases of corporate bonds with negative yields and allowing for a more natural increase in long-term rates. Of course, the BoJ could do nothing at which point USDJPY becomes a very attractive buy before and after FOMC.
Data Review
- CBI Trends Total Orders 11 vs 9 Expected
- CBI Trends Selling Prices 13 vs 15 Expected
- CBI Business Optimism -3 vs -6 Expected
- BoE Rate Decision - Investors are looking for a rate hike. Guidance will also be very important
- PMI Manufacturing - Potential for downside surprise given slightly lower CBI index
- PMI Services and Composites - Will update after manufacturing PMI and Gfk
- Support 1.2950
- Resistance 1.3250
For the first time this year, the Bank of England is expected to raise interest rates but based upon sterling’s recent performance, investors are not convinced that a rate hike is a done deal. The problem is that while there have been improvements in manufacturing and service sector activity, retail sales contracted and wage growth slowed in the month of May. If not for the inflation, which is running well above the central bank’s 2% target the BoE could probably wait until the end of the year to tighten monetary policy. However, with CPI growth at 2.4% and the weaker sterling putting additional pressure on prices, the BoE is expected to upgrade their inflation forecasts and take steps to bring CPI back to target. What’s significant about this month’s meeting is that it is accompanied by the Quarterly Inflation report and a press conference by Governor Carney. The Quarterly report is often used as a vehicle to explain or signal a major policy change and the first rate hike of the year would certainly qualify. Yet what investors want to know is when the central bank will tighten again and unfortunately we don’t think that it will be anytime soon given mixed data and Brexit uncertainty. The table below shows the unevenness of the economy since the last policy meeting. Retail sales declined and wage growth weakened while manufacturing and service sector activity accelerated. If the BoE hikes but suggests that they may not need to tighten again this year, GBP/USD could give up its initial gains quickly. However, if the BoE is overwhelmingly hawkish and suggests that more needs to be done to bring inflation lower, GBP/USD could hit 1.34. The monetary policy announcement is the most important event risk for GBP this week but the PMIs are also worth watching, especially the manufacturing report which comes a day before the rate decision.
Data Review
- ECB Keeps Rates Unchanged, No Surprises
- EZ Consumer Confidence -0.6 vs -0.7 Expected
- GE Manufacturing PMI 57.3 vs 55.5 Expected
- GE Services PMI 54.4 vs 54.3 Expected
- GE Composite PMI 55.2 vs 54.8 Expected
- EZ Manufacturing PMI 55.1 vs 54.6 Expected
- EZ Services PMI 54.4 vs 55.0 Expected
- EZ Composite PMI 54.3 vs 54.8 Expected
- GE IFO Business Climate 101.7 vs 101.5 Expected
- GE IFO Expectations 98.2 vs 98.1 Expected
- GE IFO Current Assessment 105.3 vs 104.9 Expected
- GE GfK Consumer Confidence 10.6 vs10.7 Expected
- EZ Economic and Consumer Confidence - Potential for downside surprise given weaker ZEW, mixed PMIs and IFO
- GE CPI - Potential for upside surprise given rise in annualised PPI
- GE Unemployment Change and Claims - Job creation unchanged. Still strong
- EZ Unemployment Rate, CPI and GDP - Will have to see how GE CPI fares. No major changes in retail sales but trade activity weakened
- GE and EZ Manufacturing PMI Revision - Revisions are hard to predict but changes will be market moving
- EZ PPI - Potential for downside surprise given weaker GE and French PPI
- GE and EZ Services and Composite PMI’s - Revisions are hard to predict but changes will be market moving
- EZ Retail Sales - Will have to see how German retail sales fares but French spending was weaker
- Support 1.1500
- Resistance 1.1800
The euro found no buyers last week despite relatively benign comments from ECB President Draghi and a temporary tariff truce between the EU and the US Having just announced plans to end net asset purchases last month, the July meeting was not expected to be a significant one. The main theme of ECB President Draghi’s press conference was that not much has changed since their last meeting. Underlying inflation is generally muted but is expected to pick up towards the end of the year, the risks to growth are broadly balanced, the latest data is in line with their June forecasts, show signs of stabilization and point to ongoing growth. The central bank affirmed that net asset purchases will end in December and reiterated their plan to keep rates unchanged through the summer of 2019. To the disappointment of euro bulls, Draghi did not provide new insight into more specific timing and the divisions within the central bank. Ultimately his view is that it is too early to call victory on inflation and the euro dropped after his press conference as investors look forward to hawkishness from the Fed and a BoE rate hike this week. As encouraging as the Juncker Trump deal may be, it is only a temporary ceasefire. The 2 parties have only agreed to suspend new tariffs while negotiations are taking place. Investors are skeptical and rightfully so given the progress followed by a breakdown in talks between the US and China and the US and Canada. Looking ahead, there’s a lot of data from the Eurozone this week including CPI and GDP but with ISM, FOMC and NFP on the calendar, the market’s appetite for US dollars should determine how EUR/USD trades. The pair has been in a tight range and prime for a breakout. In our opinion, the risk is to the downside with EUR/USD potentially falling to 1.1550.
h3 AUD, NZD, CAD/h3 h3 Data Review/h3
Australia
- CPI 0.4% vs 0.5% Expected
- PPI 0.3% vs 0.5% Prior
New Zealand
- Trade Balance -113m vs 200m Expected
- ANZ Consumer Confidence Index -1.3% vs.-0.8% Prior
Canada
- Wholesale Trade Sales 1.2% vs 0.7% Expected
Australia
- Chinese Manufacturing and Non-Manufacturing PMI’s - Chinese data is very market moving but hard to predict
- PMI Manufacturing - Potential for downside surprise given weakness in yuan
- Trade Balance - Will have to see how AU PMI Manufacturing fares but likely to be weaker
- Services PMI and Retail Sales - Retail sales are released the same day as PMI services so difficult to predict
New Zealand
- Employment Report - Potential for downside surprise given weaker job growth in manufacturing. Unevenness in services. Manpower employment survey shows weakness as well
Canada
- GDP - Potential for downside surprise given very strong retail sales but weaker trade
- International Merchandise Trade - Potential for upside surprise given stronger IVEY PMI
- Support AUD .7300 NZD .6700 CAD 1.3000
- Resistance AUD .7500 NZD .6900 CAD 1.3300
Having traded in a tight range for most of July, the Australian and New Zealand dollars are itching for a breakout and this could be the week that it happens. Although a break will most likely be driven by the US dollar, there’s enough local data to contribute to a move. From Australia, we have the manufacturing and service sector PMIs due for release along with retail sales and the trade balance. Stronger labor market data and an uptick in inflation failed to lift the currency. Although price consumer price growth failed to rise as much as economists anticipated in the second quarter (they were looking for 0.5% growth vs. 0.4% actual), on an annualized basis, CPI rose above the central bank’s target to 2.1% from 1.9%. Unfortunately, Aussie’s gains have been capped by the fact that the central bank has its hands tied as they wait to see how China responds to the pressure on the economy and the threat to future trade activity. So far, the PBoC has allowed the yuan to fall to 13-month lows, which is negative for the currency but last week, the government rolled out a series of policies to support growth including a reduction in corporate taxes and faster infrastructure spending. They have more plans to be proactive which in the long run should aid Australia’s economy but in the short term, there could be more pain before gains for the Australian dollar as this week’s data could see the drag from slower Chinese growth and Yuan weakness. Trade talks between the US and China aren’t going well either with China threatening retaliation to “any” amount of US tariffs.
The New Zealand dollar is holding up well versus AUD, which is a surprise since there’s more underlying weakness in New Zealand’s economy than Australia’s. This may have to do with the fact that NZD sold off aggressively in the second quarter. Data continues to disappoint with New Zealand’s trade balance turning from surplus to deficit in the month of June. Exports plunged as milk powder volumes dropped 32% while imports rose on stronger fuel demand. We don’t expect this week’s labor market report to help NZD/USD as the manufacturing sector reported weaker job growth while the services sector reported uneven activity.
The only commodity currency that is performing well is the Canadian dollar. Following strong retail sales and inflation data, USD/CAD extended its losses last week. The truce between the EU and US also raised hope that a similar deal could be reached with NAFTA. Unfortunately, high-level discussions ended last week with no agreement. US trade negotiator Lighthiser said he hopes there will be a deal soon but he doesn’t know if it's going to happen, which isn’t good news for the Canadian dollar. With that in mind, the loonie could receive a lift from data this week as the latest GDP and trade reports are likely to be stronger. With USD/CAD trading below the 50-day SMAA, the next stop should be 1.2950.
/h3
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