RBA & RBNZ Cash rate decisions together

With the closure of a rather interesting but mediocre current week in terms of importance of economic data, traders now turn their focus towards the week ahead and the opportunities that the events and fundamentals may present. The star events of the week forward, are the Interest rate decisions from the RBA and the RBNZ, while the closing will consist of the US employment report, with all these events having their own significance independently. This report will overview the current fundamentals behind the most popular currencies in the world, the economic releases or events that could move them, along with our personal ideas on how things could play out. This presentation aims at providing traders with the tools necessary to trade accurately during the days ahead.

USD – US employment report

The greenback has broken to new yearly highs in the current week, as the Dollar Index has surpassed previous high levels observed back in August. In the past days, the USD had gained ground against all of its major counterparts and could possibly close its fourth consecutive week in green territory displaying extreme power. During the US session on Thursday, the Senate passed legislation extending government spending until Dec. 3. US President Joe Biden signed the legislation just hours before the current funding expires, avoiding a partial government shutdown. Yet at the same time, a tough debate between the Democrat party members over the infrastructure bill, seems to persist keeping the markets in a wait and see position. Moving to the Federal Reserve which could also have a say on the debt limit matter, in the past days Fed Chair Jerome Powell highlighted the fact that the unemployment rate remains rather high, while inflation is way above the FOMC’s target of 2%. These comments tend to clarify the Fed Chairman’s worries over the monetary policy path ahead. Moreover, at the moment the US economy is also facing significant pressure over supply chain disruptions and some of the biggest ports in the US are building up cargos and are unable to unload new ships. At the moment, availability of goods and services is slowing down recovery, substantially. Headlines on this subject should not be taken lightly by traders as they can move the greenback notably. This is a matter that is in a way affecting the US from external happenings but also internally with the scarcity of truck drivers, workers and warehouses. On a separate note, the U.S. Treasury yields rose in the past week with some stabilizations incurring in the latest sessions, yet the reaction has been strong enough to be felt across risk assets like precious metals and Stock markets that are down for the week. Finally, in the coming week we start Monday the 4th with the US Factory orders for August while on Tuesday we get the International Trade figure for August, the Final Markit Services and Composite PMIs for September along with the important ISM non-Manufacturing figure for September. Moving to Wednesday when we get the ADP National Employment for September and on Thursday we get the weekly initial jobless claims figure. The primary event comes on Friday with the US employment report for September when the NFP figure, the unemployment rate and the Average Earnings rates will be released. This event has traditionally been characterized by high volatility that could last for hours depending on the results. Traders should be very careful if they are to engage the market before during or even after the event, as intense volatility could be seen across the board.

EUR – Eurozone Retail Sales rates

Since the start of the current week the EUR has lost ground against most of its counterparts including the USD, the CHF and the JPY. On the contrary, the EUR has gained notable ground against the GBP. The most significant updates from a monetary policy stance came from the ECB president Christine Lagarde. The Financial Times noted ECB’s chairwomen re affirming the banks decision to stick to a loose monetary policy for the time being even though other large central banks are leaning towards tighter monetary policy in the very near future. This was also noted in the ECB September meeting report, even though a suggestion for moderately lower bond purchases was included. The main idea behind tighter monetary policy is possibly higher inflation rates which are prompting some central banks to change stance. As the Eurozone has seen its main inflation indicators rise in the short term, the ECB could be taking some risks by postponing monetary tightening. In the previous days inflation rates from Germany and France rose substantially in September reaching levels much greater than the <2.00% benchmark rate the ECB uses, while rates are expected to rise even more in the short term. At the moment the block is having a very challenging time dealing with Natural gas prices which are up over 10% in the current week and have reached multiyear high levels in 2021 which is ultimately limiting sectors that are using gas as a source of energy for production or services. In the next week, we see traders focusing first on Monday the 4th with the Eurozone Sentix index for October and the Euro group meeting which will include a discussion between the block’s economic leaders over several important subjects. Moving to a very busy Tuesday with the Eurozone, French and German Markit Services and Composite Final data for September, along with the Eurozone Producer Prices readings for August. On Wednesday we have a rather important day with the German Industrial Orders and the Eurozone Retail Sales rates both for August. On Thursday the German Industrial Orders for August and the French Reserve Assets figure for September will be released while we close the week on Friday with the crucial German Trade Balance figures.

GBP – Halifax House Prices rates

The week seems to be ending in a rather disappointing fashion for the Pound as the currency has lost against all of its major counterparts on a weekly basis. During the past days Bank of England Governor Andrew Bailey stood in the spotlight with various comments. On Wednesday Bailey stated that the main focus remains on the labour market and inflation, while he also added that BOE’s preferred tool to deal with the recovery is interest rates, which could possibly be perceived as rate hikes from our point of view. He cleared that this is not an action to be taken in the upcoming BOE meeting in November thus leaving the door open to a number of scenarios for the time being. In the UK, petrol stations are having a difficult time dealing with demand at the moment. The country is not in a supply deficit but rather in a lorry driver shortage. Drivers are scarce as a consequence of the virus but also of Brexit which is just now starting to show its impact. The matter remains very serious as fuel shortages can disturb various industries and could carry its impact into the holiday season or even the next year. Nonetheless, in the new week traders will have a rather light economic calendar with the Final Markit Services PMI and the Reserve Assets both for September coming up on Tuesday, while on Wednesday we get the Markit Construction PMI reading again for September. Finally on Thursday we get the vital Halifax House Prices rate for September.

JPY- Japanese Current Account

The JPY is currently ending the week sending mixed signals against a number of currencies. On a weekly basis the JPY has been stronger against the GBP and the EUR, while it has lost ground against the USD. The currency presents various opportunities against these counterparts and traders should note the versatility in each situation. In the past days Japan’s governing Liberal Democratic Party elected Fumio Kishida as the most probable next Japanese prime minister. In the next month, Japan’s Parliament will hold an event to officially select the new prime minister, while provided that the Liberal Democrats control the legislature, Mr. Kishida’s appointment is very likely. On the other hand, BOJ’s Governor Haruhiko Kuroda stated in the past days that Japan’s economic growth could return to pre pandemic levels later this year or early next year, but that the BOJ will further ease monetary policy if needed did not impress for now. Long term traders should keep these comments in mind. JPY traders have a rather short calendar for the week ahead starting on Tuesday with Tokyo’s Inflation rates and the Final Markit Services PMI for September. On Friday we get the Japanese Current Account figure for August.

AUD – Reserve Bank of Australia’s Cash Rate decision

The AUD is also among the currencies that remained stronger against most of its major counterparts like the NZD, GBP and the EUR, while it remains weaker for the time being against the USD. AUD traders will have the opportunity to focus on one of the star events of the upcoming week which is none other than the Reserve Bank of Australia’s Cash Rate decision. This event will take place on Tuesday the 5th while a little bit earlier on the same day we also get the Australian Trade Balance for August. On Tuesday, the RBA is widely expected to keep rates on hold at 0.10% with the AUD OIS at the moment indicating a probability of 99.66% for no change to prevail. Caution is advised as the AUD can move abruptly during the release. RBA has totally discarded suggestions for interest rates hikes despite the country facing a red hot housing market at the moment. The RBA through its Governor Philip Lowe cleared just a few weeks back that early policy normalization
is not in the bank’s cards, while this scenario is targeted for 2024. At the moment employment seems to remain a priority, while wage growth which connects to the Inflation rate target (2%-3%) of the bank is also arguably of critical importance. AUD traders should also note the RBA Financial Stability Review to be presented on Friday the 8th along with the Chinese Caixin Services PMI for September as they can affect the Aussie in the short term.

NZD – Reserve Bank of New Zealand Interest rate decision

The New Zealand Dollar will also be closely monitored by traders in the upcoming week with the Reserve Bank of New Zealand Interest rate decision being in focus as the main event. Since the start of the current week, the NZD has indeed lost ground against the volatile USD, the EUR, the GBP, and very notably against the AUD. According to NZD OIS a probability of 96.83% is in favour of a rate hike from current 0.25% to 0.50%, which makes the event fantastic for traders. The event should not be considered a piece of cake as the central bank was expected to hike interest rates back in August but at the last moment decided not to do so. Thus caution is advised for the specific event as overconfident traders may get caught. In general, the New Zealand economy is in very good shape according to some of its most important data. Its GDP rate stands at 17.4% and its unemployment rate stands at 4.0% both counting for Q2, which may provide very little room for improvement. Some doubts have prevailed recently after the country had observed an unexpected rise in virus cases despite being a “fortress” for most of the current year.
At this point we would also like to add a small comment for CAD traders as they can anticipate the Canadian employment report coming up on the 8th of August Friday.

Conclusion

As a final conclusion we would like to leave our readers with some matters that may require extra caution and further room for research. First is the supply chain matter that is affecting all the world at the moment. This matter can worsen in the coming weeks and volatility may increase in the stock markets affecting large US tech companies in particular or even automakers and semiconductor manufacturers. Second matter is China and its plans to bring the largest parts of its economy under state control. China is now attempting to control local Chinese companies from getting too much economic power while this movement can also impact offshore companies in the mainland, especially US ones. These actions can bring some companies and markets under pressure in the short term while these actions could be even stronger in the near future. Another important matter is China’s energy crunch issue that can destabilize production on a large scale adding further weight to the current supply chain matter if the Chinese government does not resolve it soon.

If you have any general queries or comments relating to this article please send an email directly to our Research team at research_team@ironfx.com

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