G20 and 9 More Reasons to Watch Currencies

Daily FX Market Roundup 02.26.16

If you think this past week was a busy one in the foreign exchange next week is certainly going to be even more active. Between the end of the G20 meeting in Shanghai to next week’s China, U.K. and Australian PMI reports along with the Reserve Bank of Australia monetary policy meeting, non-farm payrolls and a number of other market moving releases, there’s no shortage of event risks capable of triggering big moves in currencies. Starting with the G20, there is a small group of economists looking for a Plaza like Accord but the chances of that type of announcement or any coordinated response to market volatility is slim. Even World Bank’s Kim said he would be surprised by coordinated G20 policy. However the initial headlines out of Shanghai suggests that policymakers are frustrated by the limits of monetary stimulus and if there’s one takeaway to headlines that we’ve seen so far it is that the Japanese and Chinese are seriously considering fresh fiscal support. If we are wrong and G20 leaders deliver more than the market anticipates, the outcome should be a relief rally in currencies and equities.

Meanwhile the most anticipated event risk next week is Friday’s U.S. non-farm payrolls report. It is the last piece of data that could change the Federal Reserve’s minds about raising interest rates in March. Even after today’s surprise upward revision to fourth quarter, many U.S. policymakers are questioning the need to tighten next month and we think they will leave rates unchanged but if the unemployment rate continues to fall and average hourly earnings growth accelerates, there could be some internal campaigning for a rate hike. However if Friday’s non-farm payrolls report fails to show material improvement, the U.S. dollar could reverse its gains as traders prepare for an imminent pause in the Fed’s tightening cycle. But before non-farm payrolls, the U.S. ISM reports, Beige Book, ADP and other leading indicators will be released helping the market set expectations for NFPs. Given the significance of the rest of the data on the calendar, we don’t expect leadership from the dollar until the second half of the week.

Instead the tone of trading in the first half of the week will be determined by Chinese PMIs as they and the NFPs bookend the week.
The recent recovery in U.S. and European equities could evaporate if Chinese manufacturing activity slows and by the same token new highs could be seen if the data shows stabilization in the economy. The Australian dollar will be particularly sensitive to these reports especially if they are weak as they will help shape expectations for the Reserve Bank of Australia’s monetary policy meeting. Some market watchers are calling for a rate cut but recent rhetoric from the RBA does not suggest that they are considering this possibility. Aside from the RBA decision, PMIs, GDP and retail sales are all potential market movers for AUD/USD. There are no major economic reports from New Zealand but NZD received a boost overnight from stronger trade numbers. Aside from China and oil, Canadian dollar traders will have to contend with the current account, GDP and IVEY PMI reports.

Euro remained under pressure today as weaker inflation and confidence numbers remind investors that the European Central Bank has the strongest chance of taking action next month.
While Germany as a whole saw CPI growth accelerate to 0.4% in February after falling -0.8% many states reported deflation pressures. On a year over year basis, Germany’s EU Harmonized CPI index dropped to -0.2%, the first decline in 5 months. Compared to the rest of the world, next week’s Eurozone calendar is light. There’s only Eurozone CPI, German retail sales and unemployment on the calendar – all of which are expected to be weaker. EUR/USD has been trapped between the 100 and 200-day SMAs for most of the past week and we are still looking for a downside break.

Sterling has proven to be surprisingly resilient. Brexit is still a serious ongoing risk for the U.K. and the latest polls show just as much support as opposition to whether the U.K. will remain in the European Union. However after significant selling at the start of the week, sterling recovered trading as high as 1.4043 overnight. Brexit will remain on the top of everyone’s minds but next week’s U.K. reports could also remind investors of the challenging conditions in the economy. Manufacturing, service and construction PMI numbers are scheduled for release and based upon the decline in orders reported by the Confederation of British Industry, activity is weak. Between Brexit uncertainty and economic woes, we continue to look for more losses in GBP/USD.

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