First Week Of September Fraught With Risks
Saxo Bank | Sep 02, 2014 01:21AM ET
European traders started the month looking for the exits as the US and Canadian Labor Day holiday ahead of the European Central Bank meeting this week made for scarce trading. This morning, several Eurozone PMIs were slightly below forecasts and underlined concerns of a weakening Eurozone economy. Despite this, the FX reaction was understated. Asian traders ignored weaker-than-expected China HSBC Manufacturing PMI, as well. Traders also ignored dire warnings about Russia, Ukraine and ISIS in the headlines as well as news of pro-democracy demonstrations in Hong Kong.
"Wake me up when September begins"
Green Day, a quasi-punk rock band, sang Wake Me Up When September Ends on their 2005 album American Idiot. Profit-minded FX traders should be singing Wake Me Up When September Begins or else risk being idiots of a different kind. This, the first week of September, is fraught with risks.
RBA will have its say
The week starts tomorrow with the Reserve Bank of Australia (RBA) interest rate decision and statement. Many economists and strategists are forecasting that both the interest rate and the statement will be unchanged. The governor may be unhappy with the level of the currency but interest rate differentials are keeping the Aussie in demand. However, the latest IMM commitment of Traders report suggests that long AUDUSD positions are being stretched, making the currency pair extra vulnerable to a doveish RBA statement.
Accentuating the negatives - Bank of Canada style
The Bank of Canada (BoC) takes a turn in the spotlight on Wednesday. Canadian interest rates are unanimously expected to remain unchanged. The latest round of domestic economic data has been fairly robust (Actual GDP 3.1 % vs. forecast 2.7%) but like his counterpart in the Hundred Acre Woods, Eeyore, Stephen Poloz and the BoC will accentuate the negatives in the Canadian economy.
The main event
Mario Draghi and the European Central Bank (ECB) are the headliners of this week's Central Bank show and for good reason. Draghi's speech and comments at the Jackson Hole Symposium appeared to have primed the pump for additional policy action at this week's meeting. The EURUSD dropped as a result. The softer Eurozone CPI data released on Friday added to the expectations. Keep in mind that Draghi has been known to strongly hint at a course of action and then do nothing when the time comes.
Explosive end to the beginning of the month
The monthly nonfarm payrolls bomb detonates on Friday. The current forecast is for a gain of 200,000. The US dollar is likely to be more vulnerable to a big miss than an upside surprise due to positioning. A gain of just 150,000 or less would validate the US Federal Reserve chairman Janet Yellen's employment concerns and lead to a quick unwinding of weaker long US dollar positions. Even a consensus print would be modestly bearish US dollars considering that the US dollar has enjoyed a healthy rally over the past two months.
Get The News You Want
Key US data releases
Tuesday: August Markit and ISM Manufacturing PMIs (Forecast, ISM 56.9). This month's release will be US dollar positive although a tad softer than July's data.
Thursday: August ADP employment change (Forecast 209,000). For some, ADP is seen as a preview of the nonfarm data. An upside surprise could lead to additional US dollar demand.
Thursday: July Goods and Services Trade Balance (forecast, deficit 42.0 billion).
Thursday: August non-manufacturing ISM (forecast 57.5). A minor dip is expected although the data is likely to be ignored ahead of Friday's payrolls report.
Friday: August nonfarm payrolls (Forecast 225,000, unemployment rate 6.1%).
Key Canadian data releases
Wednesday: Bank of Canada interest rate decision and statement.
Thursday: July Merchandise trade balance (Forecast $1.1 billion). The drop in oil prices may have led to a drop in the trade surplus.
Friday: August employment report (Forecast 10,000). Last month's data debacle should diminish the impact of any large deviation from the forecast but that is probably just wishful thinking.
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