This is a light week for U.S. economic data and we are getting taste of the reduction in the volatility today with U.S. bond markets closed for Veteran’s Day and currencies trading quietly. The U.S. dollar is trading slightly higher against most the major currencies with the exception of the euro. Taking a look at the U.S. data calendar, the most market moving economic reports expected this week will be the trade balance and Empire State manufacturing survey, both of which are Tier 2 reports that do generally have a significant impact on the dollar. So instead, investors will continue to spend the week digesting the non-farm payrolls report and its implications for Fed tapering. We may not have much in the way of U.S. data but there are still forces that could drive the dollar higher this week.
There have been a significant amount of positive surprises in U.S. data but many investors are still undecided on how quickly they think the Federal Reserve will taper. The less dovish tone of the last FOMC statement and stronger data means that tapering in December is still an option. However next month’s meeting is Bernanke’s last and shortly after his successor takes office, Congress is expected to reenact the fiscal debate as the debt ceiling was extended only until early February. This makes the comments from Federal Reserve Presidents this week exceptionally important.
Kocherlakota, Lockhart, Fisher, Plosser and Fed Chairman Ben Bernanke are scheduled to speak and while none of these policymakers are voting members of the FOMC this year (except Bernanke), Kocherlakota, Fisher and Plosser vote in 2014. It will be important to see if they are share their colleagues worries about the costs of too much stimulus and feel that the Fed should advance its timetable for tapering given the recent improvements in data. The dollar would benefit from less dovishness from these officials even if they do not have a vote in the FOMC until next year. Remember, December and March are not the only time that the Federal Reserve could act because they have a meeting in January and even if there is no press conference scheduled, this does not preclude the possibility of one being held if the new Fed Chairman deems it necessary. Aside from these speeches, investors will also be watching Janet Yellen’s confirmation hearing on Thursday. If the hearings go smoothly and there is no major opposition to her confirmation, the dollar could rise in relief because there will be one less uncertainty weighing on the market.
Meanwhile U.S. 10-year Treasury yields rose to their strongest level in 7 weeks on Friday and a continued rise in yields should fuel further demand for dollars. With no major economic reports expected to threaten the outlook for the greenback this week and force investors to reconsider their long dollar trades post NFPs, there’s a good chance 10-year bond yields will crawl towards 3%. We have already seen USD/JPY break above 99 and if bond yields hit 3%, we expect USD/JPY to be trading above 100.
Finally, aside from Janet Yellen’s confirmation hearing, the big focus this week will be on China. The government is holding its third plenum of the central committees and after the meeting, they are widely expected to unveil a comprehensive economic and political reform plan that could mean dramatic changes for China and the world.
There are many areas in China that are in desperate need of reforms – state enterprises, land ownership and of course pollution. We already know what some of these reforms could look like because the Development Research Center of the State Council released an ambitious plan to create a “vibrant, innovative and inclusive economy protected by the rule of law” that focuses on the market, government and corporations last month. Dubbed the 383 Plan, it includes 3 areas of reform, 8 sectors to reform and 3 major reform breakthroughs. A lot of these are social changes including a social security system, environmental protections, new land ownership and transfer rights, trade liberalization, policies to encourage innovation, plan to reduce corruption and government interference on the economy. The Third Plenum is not expected to have an immediate impact on currencies, although given the amount of buzz around this meeting and the promises that have been made, there’s always the risk of the announcements falling short of expectations. Economists could also become concerned about China’s ability to achieve these goals without slowing growth dramatically. As a result, this poses a greater downside than upside risk for high beta currencies if China disappoints which could also benefit the dollar.