Forex: Top 5 Events Affecting Trade Next Week

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Daily FX Market Roundup 05-09-14

Forex: Top 5 Events Affecting Trade Next Week

EUR – At Least Another Cent of Losses

Make or Break Week for Sterling

CAD Employment a Trend Changer for USD/CAD

AUD: RBA Lowers Inflation Forecast, Upgrades GDP

GBP: BoE Leaves Monetary Policy Unchanged

Base Currency Movements Drive the Yen

Forex: Top 5 Events Affecting Trade Next Week

The increase in currency volatility this past week should come as no surprise given that we had major economic reports released from every corner off the world. The trading ranges of many currency pairs expanded significantly which is a breath of fresh air for all traders that have been frustrated with the recent consolidation in foreign exchange market. There’s a very good chance that we will continue to see big moves in the coming week because more Tier 1 economic reports are scheduled for release from the U.S., U.K. Eurozone, Japan and China. While there’s no shortage of key reports, the top 5 event risks affecting FX trade will be the following (in order of release):

1. Chinese Industrial Production

2. US Retail Sales

3. Bank of England Quarterly Inflation Report

4. Japanese GDP

5. Eurozone GDP

We’ll discuss the U.K., Japanese and Eurozone reports in the appropriate sections below but Chinese data has the ability to not only affect demand for the Australian and New Zealand dollars but could also impact the general risk appetite of the market. According to recent economic reports, the Chinese economy is bottoming and next week’s data needs to show an uptick in industrial production for investors to be convinced that this notion continues to hold true. If the data surprises to the downside it could set a negative tone for trading across the financial markets. In the U.S. the only economic report that could ease the pain for the dollar is retail sales. We know that the labor market improved last month but economists are looking for consumer spending growth to slow. We think that the data could surprise to the upside given stronger sales reported by the International Council of Shopping Centers and Johnson Redbook. If we are right, USD/JPY could find near term support at the start of next week’s trade. However the upside will be limited because even if spending rises by 1%, the Federal Reserve has made it clear that they will not be in a rush to raise interest rates. Monetary policy will remain on its current course regardless of the outcome of Tuesday’s retail sales report. Aside from the consumer spending number, inflation, Philly Fed survey, Industrial production, housing starts and consumer confidence are also scheduled for release.

EUR – At Least Another Cent of Losses

Even without disappointing German trade numbers, the euro would have extended its losses against the U.S. dollar today. However the downside surprise added another cent in losses for the currency pair. Germany’s trade surplus rose to 16.4B from 16.2B, which could have been perceived as good news if not for the 17.4B forecast and 1.8% drop in exports. This report illustrates the strain that the high exchange rate is having on the Eurozone economy and trade activity. By signaling that they are prepared to ease monetary policy in June, the European Central Bank has completely shifted the near term outlook for the currency. Mario Draghi’s comments on Thursday were a complete game changer for the euro. We now expect the currency pair to drop to at least 1.3650 if not lower. Buying euros right now is not a good idea because the ECB has put themselves into a unique situation of being the only major central bank planning to ease. The next ECB meeting is also 2 weeks before the next FOMC meeting, which means that investors can focus on positioning for a move by European policy makers. If the central bank eases next month, their most likely course of action will be a cut to the refi rate and/or move to a mildly negative deposit rate. Next week’s Eurozone CPI and GDP reports will go a long way in shaping the market’s expectations. If CPI growth slows as much as expected and growth increases modestly, speculators will have another reason to sell euros. The German ZEW survey is also scheduled for release along with German Q1 GDP and Eurozone trade balance.

Make or Break Week for Sterling

The big question of whether sterling tops out below 1.70 or breaks it in a convincingly will be answered with the release of the Bank of England’s Quarterly Inflation report next week. Based on the overall resilience of the currency, investors have been hoping for hawkish comments from the central bank that would reinforce their belief that the BoE will be the next major central bank to raise interest rates. While there have been improvements in the economy, low inflation and the slack in the labor market has given the central bank very little desire to rush into tightening monetary policy. However if they were to move closer to doing so, they would most likely telegraph their intensions in the Quarterly Inflation Report. This week, the BoE reminded us in their monetary policy statement that their economic forecasts would be updated so even if the monetary policy committee does not provide any insight into their plans for tightening, traders will be able to look at their forecast changes to get a gage of how close they are to tightening. Unless no changes are made to the forecasts, the Quarterly Inflation Report will determine whether GBP/USD breaks 1.70. We think that the BoE will upgrade their economic projections, providing additional upside momentum to sterling. Labor market numbers are also scheduled for release but considering that the data comes out an hour before the Inflation Report, the impact on the currency should be limited.

CAD Employment a Trend Changer for USD/CAD

The downtrend in USD/CAD shifted quickly and aggressively after this morning’s Canadian employment report. Although job growth was widely expected to slow in the month of April, only 1 out of the 21 economists surveyed by Bloomberg anticipated job losses. A total of 30k full time jobs were lost last month with only a gain of 2k in part time employment. While the unemployment rate held steady at 6.9%, the labor force participation rate fell to a 12 year low of 66.1% from 66.2%. This is not only terrible news for the labor market but the economy as a whole and it hardens the argument for additional easing. The last time we heard from the Bank of Canada, they cut their 2014 GDP forecast and said they can’t shut the door on further rate cuts. With today’s release, traders will be raising their bets on additional easing which should drive USD/CAD higher. The currency pair has already appreciated 0.6% on the back of the employment report and we believe that this number is enough of a trend changer for USD/CAD that the pair will revisit 1.10. There are no major economic reports scheduled for release from Canada or Australia next week. New Zealand only has a quarterly retail sales report due but Chinese retail sales and industrial production could set the tone for trading in the commodity currencies. Last night we learned that consumer price growth in China slowed in the month of April but with growing beginning to pick up, there is very little urgency within the PBoC to ease.

JPY: Don’t Make Too Much of Q1 GDP

Next week will also be a busy one for the Japanese Yen. In addition to the monthly trade balance, first quarter GDP numbers are will be release and this data will tell us exactly how much momentum there was in the economy before the sales tax increase. Consumers spent voraciously ahead of the increase and as a result, GDP growth is expected to accelerate significantly. However the impact on the Yen should be nominal because the pace of growth before the tax was increased matter far less than the pace of growth after. So far, we have seen very little evidence of a contraction in economic activity but we’ve only started to receive the data for April. It is widely believed that the growth will slow further in the months ahead. All of this is very important but like this past week, given the abundance of key data from other parts of the world the yen will trade on the market’s appetite for the base currency. Keep an eye on USD/JPY and U.S. yields because a further decline in rates could drive all of the Yen crosses lower.

Kathy Lien
Managing Director

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