Forex Major Currencies Outlook (Oct 14 – Oct 18)
The strength of the US consumer, employment data from UK and Australia, slew of economic data from China headlined by Q3 GDP and European Council summit will be the highlights of the week.
FED Chairman Powell reiterated the FED’s data-dependency stance and stated that they will closely monitor incoming data and adjust monetary policy accordingly. He also added that global economic slowdown and geopolitical risks are a factor that impacts policy decisions. In addition, FED will buy Treasury bills in order to calm the money market and although this will expand FED’s balance sheet, it should not be viewed as another round of QE.
FOMC meeting minutes showed increased concern by members regarding global economy and trade tensions. Labour market and overall economy are strong according to the readings. There was a division within with several policymakers favouring keeping the rates steady while couple of policymakers stated that a rate cut might be too much insurance.
September CPI came in at 1.7% y/y vs 1.8% y/y as expected with core CPI staying the same at 2.4% y/y. Earnings data came weaker than expected with average weekly earnings at 0.9% y/y vs 1.1% y/y as expected and average hourly earnings 1.2% y/y vs 1.5% y/y as expected. The small drop in headline number as well as drops in wages could add additional reason for the rate cut at the end of the month. Odds of an October rate cut rose to almost 82%
This week we will have consumption, housing and industrial data.
Important news for USD:
- Retail Sales
- Housing Starts
- Building Permits
- Industrial Production
Factory orders from Germany for August came in at -0.6% m/m and -6.7% y/y indicating further deterioration in the manufacturing sector. Foreign orders were up and previous numbers have been revised up so that is a small positive from the report, but data will continue to deteriorate until there is some sort of an agreement in US-China trade war. German industrial production surprised to the upside by coming in at 0.3% m/m vs -0.1% m/m as expected. Positive news was welcomed by the markets and EUR strengthened on the news, however EURUSD stayed below 1.10 level. Later on, during the week 1.10 level was breached due to weaker USD.
ECB accounts from the September policy meeting showed that although re-introduction of QE had a “clear majority” some members were against it on the basis of it not being an efficient instrument given low yields. Some policy members argued for a 20 bps rate cut if no QE was introduced. Rate tiering had “majority” while 10 bps rate cut had “very large majority”. Divisions within ECB are shown also with some members questioning growth forecasts that were too optimistic according to them.
This week we will have industrial and inflation data, ZEW economic sentiment reading and summit of the European council where talks about the Brexit situation will be the main subject.
Important news for EUR:
- Industrial Production
- ZEW Economic Sentiment Indicator (EU and Germany)
- Thursday and Friday:
- European Council Summit
GDP figure for August came in at -0.1% m/m vs flat as expected. Reading from previous month was revised up to 0.4% m/m which pushed 3m/3m figure to 0.3% vs 0.1% as expected. According to the latest reading UK will most likely avoid technical recession, but Q3 outlook is not rosy. Manufacturing and industrial production data dropped from the previous month and came in weaker than expected at -0.7% m/m vs 0.2% m/m as expected and -0.6% m/m vs 0.1% m/m as expected respectively. Construction output was a bright spot coming in at 0.2% m/m vs -0.4% m/m as expected. Trade balance data showed a deficit of -£9.8bn vs -£10bn as expected with imports increasing by 0.1% m/m due to Brexit stockpiling while exports fell -0.5% m/m. Markets were not moved by the data as Brexit developments continue to drive the pound.
The UK government plans to challenge Parliament’s effort to block a no-deal exit with the Supreme Court. PM Johnson will have to make a deal by October 19, otherwise he would have to ask EU for an extension of Brexit by January 31 according to the newly created parliament bill. Government stance is still that UK will leave EU on October 31. The risk of no deal has been postponed but it still lingers. Parliament is currently suspended until the Queen delivers her speech on Monday. Talks between PM Johnson and Irish PM Leo Varadkar were on the positive side with comments such as that they “see a pathway to a possible deal”. Markets accepted it and pushed GBPUSD some 250 pips in about 3 hours of trading. Overall the optimism in the markets is elevated as more and more financial institutions go bullish on GBP.
This week we will have employment, inflation and consumption data but all of that will be topped by the approaching deadline date for requesting an extension regarding the Brexit date.
Important news for GBP:
- Average Weekly Earnings
- Unemployment Rate
- Retail Sales
Caixin services PMI for September came in at 51.3 vs 52 as expected thus making composite at 51.9 vs 51.6 the previous month due to strengthened growth in the manufacturing sector. New business sub index rose to the highest reading since the beginning of 2018 which reflects a stable demand in services sector. Employment sub index also rose on the back of rise in new orders.
This week we will have RBA minutes from the latest meeting as well as employment data from Australia and trade balance, inflation, consumption and industrial data capped with Q3 GDP reading from China.
Important news for AUD:
- Trade Balance (China)
- Exports (China)
- Imports (China)
- RBA Meeting Minutes
- CPI (China)
- PPI (China)
- Employment Change
- Unemployment Rate
- GDP (China)
- Retail Sales (China)
- Industrial Production (China)
Electronic card retail sales, precursor for the retail sales reading as it attributes with up to 70% to retail sales, in September came in weaker than expected. Readings showed 0.4% m/m and 0.3% y/y vs 0.5% expected in both readings. Manufacturing PMI came in at 48.4, same as the previous month for the third consecutive month of contraction. New orders sub index returned to expansion with 50.1 but due to the weak readings in previous months it pulled production down to 46.2 which is the lowest reading since April of 2012.
This week we will have bi-monthly GDT auction as well as inflation data for Q3.
Important news for NZD:
- GDT Price Index
The September employment report smashed all expectations. Employment change came in at 53.7k vs 7.5k as expected, the unemployment rate dropped to 5.5% vs 5.7% as expected and hourly wages jumped to 4.3% vs 3.8% the previous month. All the important categories handily beat the expectations and as icing on the cake full time jobs rose by 70k. This very strong report should drop rate cut expectations for the end of month to 0 and keep CAD supported during the week. Housing starts in September came in line with expectations at 221.2k. Building permits surprised to the upside with a huge beat coming in at 6.1% vs 1% as expected.
This week we will have inflation data and data on manufacturing sales.
Important news for CAD:
- Manufacturing Sales
Wages keep being negative, although they improved from the previous month. They came in as expected in August, labour cash earnings at -0.2% y/y and real cash earnings at -0.6% y/y. With absence of a wage rise, inflation will stay low and with a new October sales tax hike it will have a detrimental effect on retail sales readings. Household spending for the same month came in at 1% y/y vs -1% y/y as expected, for the ninth month of y/y gains, reflecting potentially increased spending due to the sales tax hike. Spending on food, furniture, household utensils, and clothing and footwear were higher according to the report. Core machinery orders, reading that is a good indicator of capex for 6 to 9 months in the future, in August came in at -2.4% m/m vs -1% m/m as expected and -14.5% y/y vs -8.4% y/y as expected for the biggest drop in almost 10 years.
This week we will have final industrial production reading for August and national inflation rate for September.
Important news for JPY:
- Industrial Production
The unemployment rate in September stayed at 2.1% as previously. One of the lowest unemployment rates in the world is still not contributing to the rise in inflation, so talks about further easing measures from SNB are becoming louder.
This week we will have trade balance data.
Important news for CHF:
- Trade Balance