FX Week Ahead

FX Week Ahead

Raffi Boyadjian, XM Investment Research Desk

Industrial output and retail sales data will dominate the economic calendar week, and inflation and employment will also be in focus. However, the week looks set to be a less dramatic one from the past seven days with policy meetings by the Bank of England and the Swiss National Bank unlikely to bring much surprises.

Australian employment report to be watched as aussie rallies

The Australian dollar is on track to end the week 1.5% higher against its US counterpart despite a neutral RBA policy meeting and a mixed batch of data. Next week’s jobs numbers will be important in assessing whether the Australian economy is gaining sufficient momentum to warrant the RBA’s view that growth will reach 3% in the coming months, having expanded at an annual rate of 1.8% in the second quarter. The August employment figures are out on Thursday and before that, the NAB business confidence and Westpac consumer sentiment gauges will be looked at on Tuesday and Wednesday respectively.

Steady as she goes in China

China posted a sixth straight month of year-on-year growth in exports in August, cementing expectations that the economy will avoid a sharp slowdown in growth in the second half of the year as the government cracks down on risky lending. The better-than-expected performance in 2017 has not only eased downside pressure on the yuan but has also enabled the People’s Bank of China to lift the currency’s mid-point versus the US dollar to its highest in 16 months this week. Data due next week on industrial output, fixed asset investment and retail sales are not expected to upset this picture. Industrial production (+6.6% y/y) and retail sales (+10.5% y/y) are forecast to improve slightly in August from the prior month, while fixed asset investment (+8.2% y/y) is expected to slow marginally.

Japanese machinery orders to bounce back

A bigger-than-anticipated downward revision to Japan’s GDP growth rate for the second quarter this week did not cause much alarm for investors as all the indications are that the world’s third largest economy is on course to expand for the seventh consecutive quarter in the third quarter, making it Japan’s longest streak of expansion this century. This should be evident next Monday, with machinery orders forecast to rebound by 4.4% month-on-month in July. Also to watch next week are corporate goods prices for August on Tuesday and the final industrial output figures for July on Thursday.

SNB likely to remain dovish

Data out of the Eurozone will be scarce next week with industrial output numbers for July being the only major release (due on Wednesday). The euro rallied to a fresh 2½-year high against the dollar after the ECB’s policy meeting this week. Against the Swiss franc, a high of similar period was reached in early August, bringing much relief to the Swiss National Bank, which has long argued that the Swissie is “significantly overvalued”.

However, the franc has gained 7% against the dollar in the year-to-date and the recent bout of geopolitical risks has brought safe havens back in favour. The SNB is therefore not expected to be satisfied with the Swissie’s broader value and is forecast to keep its three-month LIBOR target rate unchanged at -0.75%. Recent data out of Switzerland has been on the weak side, with second quarter GDP sharply missing estimates to grow by just 0.3% over the quarter and annual inflation running at a paltry 0.5%. This points to the SNB maintaining its dovish tone and exchange rate warning when it meets for its latest policy decision on Thursday.

Bank of England under spotlight as rate hike odds diminish

The Bank of England will have gotten its hands on the latest UK inflation and jobs data before concluding its two-day monetary policy meeting on Thursday. Inflation numbers are out on Tuesday and annual CPI is expected to tick higher again, rising to 2.8% in August. The core rate is also forecast to edge upwards, to 2.5%. Unemployment data due on Wednesday will likely show the jobless rate holding steady at 4.4% in the three months to July. Average weekly earnings growth is forecast to accelerate slightly to 2.3% y/y during the same period, though this remains below the level of headline inflation, meaning real incomes continue to decline.

Attention will shift onto the Bank of England on Thursday, with the Monetary Policy Committee retuning to its full nine-member board as the new Deputy Governor, Sir Dave Ramsden, attends his first meeting. The Bank shocked markets in June when three MPC members voted for a rate hike. That figure fell to two in August and it will be interesting to see which way the newest member will vote. Following the replacement of Kristin Forbes by the more dovish Silvana Tenreyro, if Ramsden also joins the doves, it will be difficult to foresee a rate hike before 2019, as per economists’ latest projections. This could be negative for the pound’s medium-term outlook, though progress in the Brexit negotiations will also strongly influence sterling’s path over the next year, with the related uncertainty already dampening UK growth this year.

US inflation and retail sales eyed

As traders price out another Fed rate hike this year, economic data may nevertheless provide some support to the hammered dollar, which has fallen to 2½-year lows this week. The US calendar will start with the July JOLTS job openings on Tuesday and August producer prices will follow on Wednesday. Inflation data will be scrutinized on Thursday as subdued prices pressures continue to puzzle Fed policymakers. The annual CPI rate is forecast to rise from 1.7% to 1.8% in August, but the core rate is expected to ease to 1.6%. Retail sales figures are due on Friday and are expected to show a month-on-month gain of 0.4% in August, down from 0.6% in July. The August CPI and retail sales numbers will be the last before the September FOMC meeting on September 19-20. Also out on Friday are industrial output data and the University of Michigan’s preliminary reading of consumer sentiment for September.

The following two tabs change content below.
S. Jack Heffernan Ph.D. Funds Manager at HEFFX holds a Ph.D. in Economics and brings with him over 25 years of trading experience in Asia and hands on experience in Venture Capital, he has been involved in several start ups that have seen market capitalization over $500m and 1 that reach a peak market cap of $15b. He has managed and overseen start ups in Mining, Shipping, Technology and Financial Services.

Latest posts by S. Jack Heffernan Ph.D (see all)

ASEANAsiaFXgrowthheffxinvestinvestingnewsreportWall Street