US CPI rates and Fed’s minutes in focus

The week is nearing its end, yet the US employment report for September is still to be released as these lines are written and we would like to have a look at what next week has in store for the markets. On the monetary front, a wide number of policymakers from various central banks are expected to take the podium and could sway the market’s mood with their statements yet the highlight is expected to be the release of the Fed’s meeting minutes on Wednesday. As for financial releases we make a start on Monday with Germany’s industrial output for August and Norway’s GDP rate for the same month and later on we get the Eurozone’s Sentix index for October. On Tuesday we note the release of Japan’s current account balance for August, Sweden’s GDP rate for the same month as well as Norway’s and the Czech Republic’s CPI rates for September. On Wednesday we get the US PPI rates for September and Canada’s building permits growth rate for August. On Thursday we note the release of Japan’s Corporate goods prices for September and machinery orders for August, the UK’s GDP rate and manufacturing output rates for August and highlight the US CPI rates for September. Finally, on Friday we get China’s inflation metrics and trade data for September, Sweden’s CPI rates for the same month, Eurozone’s industrial production for August and in the American session the preliminary US University of Michigan consumer sentiment for October.

USD – US CPI rates and the Fed’s minutes to shake the greenback

With the market wondering where the USD’s ascent will end, the greenback seems about to end the 12th week in the greens against its counterparts, yet the US employment report for September is still to be released and could alter the direction of the greenback. On a fundamental level, we note that the US government was able to avoid a shutdown, yet it seems that they just kicked the can further down the road, as a second crisis looms in November. The issue gained importance as McCarthy, who was a moderating voice among Republicans, was ousted as a House Speaker. The question arises whether the new House Speaker is to be a Republican hardliner from the far right, a scenario that could make any compromise more difficult and thus could weigh on USD. On the monetary front, Fed policymakers seemed to be divided on whether another rate hike is necessary or not. Market focus is now turning on the release of the Fed’s September meeting minutes. Should the minutes actually verify that the bank may maintain a hard hawkish stance and be prepared to hike rates once again, should inflation not retreat, we may see the USD getting some support. Yet that is also related to the release of the US CPI rates for August next Thursday. Should the CPI rates accelerate or even fail to slow down, implying a persistence of inflationary pressures in the US economy, we may see the
market repositioning itself and pricing in the possibility of another rate hike from the Fed, which in turn could support the USD.

GBP – GDP rates in the epicentre

The pound seems about to end the week lower against the USD and the JPY yet remained relatively stable against the EUR. On a fundamental level, we note that the UK government tends to get high disapproval rates, an issue which may not have an effect on the market directly, but still tends to weaken the stability of the UK political scene. It’s characteristic that the opposition, the Labour Party, is reported to get 44% in the polls, leading the way by 16% to the governing Conservatives. On a monetary level, we note that there still seem to be some hawkish tendencies in the BoE despite the bank remaining on hold at its last meeting. We highlight BoE Governor Bailey’s comments that “the job is not done” in the fight against inflation. The statement may have been interpreted as a signal for another rate hike to come, yet the market still expects the bank to remain on hold in its next meeting. The recent contraction of economic activity in the UK construction sector and the drop in house prices would be understandable given the restrictive finsncial environment the BoE has created. In the coming week, we turn our attention to UK’s Halifax House prices for September and the GDP rate for August and if another shrinking of the UK economy is reported it may weigh on the pound.

JPY – Japan’s market intervention?

JPY may be an exception among the majors as it seems to end the week slightly stronger against the USD and seems also to be gaining against the EUR and GBP, in a sign of broader strength for the week. Yet that did not seem to happen by chance as there was a wide rumour that the Japanese Government intervened in the market supporting its currency on Tuesday’s American session. The market intervention was not verified by Japanese officials, yet the overall circumstances tend to point towards such a scenario. We have to note that Japanese officials were reported warning the markets that the Japanese government will not rule out any options in the face of sharp downward movements of JPY. In any case, we have to note that the market intervention seems to have stabilised JPY for now, yet that may prove to be temporary, as BoJ’s dovish stance is still present and could weigh on the Japanese currency. It’s characteristic that the Japanese central bank hiked Japanese Government Bond purchases as yields hit a decade’s peak. The main factor behind the yield spike was considered to be the release of BoJ’s summary of opinions for the September meeting. The document showed that BoJ policymakers consider “Achievement of 2 per cent inflation in a sustainable and stable manner seems to have clearly come in sight” and may allow the bank to review the situation around January to March next year. On a macroeconomic level, we highlight the wider-than-expected improvement of the Tankan indexes in both the manufacturing and non-manufacturing sectors, which tends to imply a resilient Japanese economy.

EUR – Eurozone’s gloomy economic outlook

The common currency is about to end the week in the reds against the USD and JPY, yet remains relatively stable against the GBP. On a fundamental level, the economic outlook tends to provide worries for EUR traders given the contraction of economic activity in the Eurozone and in Germany in particular. It’s characteristic that high energy prices in combination with a sharp green turn for German politics and the ECB’s high interest rates have thrown the economic powerhouse of Europe in disarray. It’s characteristic that the traffic light coalition ruling Germany lost its appeal some time ago and there seems to be wide discontent among Germans, with the far-right AfD gaining in polls and becoming the second party with over 20%, right after the opposition centre-right party CDU. The coalition partners SPD, Greens and FDP are now set at the third, fourth and fifth positions respectively. The ruling parties are expected to suffer a defeat by a landslide in the crucial Bavarian elections on Sunday and that may provide some friction in the relationship of the three ruling parties, which in turn may weigh on the EUR. On the monetary level, the market does not seem to expect the ECB to hike rates again yet the bank does not seem to be willing to cut rates either, according to ECB Vice President De Guindos, solidifying the market’s expectations for a prolonged period of high rates which may weigh further on economic activity in the Eurozone. On a macroeconomic level, we highlight that the 4th monthly contraction of economic activity as reported by Eurozone’s Composite PMI figure was confirmed while France’s industrial output fell into the negatives for August. A positive sign may have been the widening of Germany’s trade surplus, yet even that was achieved by a shrinking of both the import and export growth rate for August. In the coming week, we note the release of France’s and Germany’s final HICP rates for
September, yet no major surprises are expected and overall we expect the area’s macroeconomics to continue to weigh on the common currency next week.

AUD – Chinese data in sight

AUD is about to end the week lower against the USD. On a monetary level, it should be noted that RBA remained on hold at 4.10% on Tuesday disappointing AUD traders and pushing the Aussie lower. Governor Bullock’s accompanying statement overall did not show any signs of intentions for another rate hike, although it was noted that the bank may proceed with “further tightening of monetary policy” if it’s necessary. It’s characteristic that under the current interest levels, the bank seems satisfied that “The recent data are consistent with inflation returning to the 2–3 per cent target range over the forecast period and with output and employment continuing to grow”. We expect the monetary outlook to weigh on AUD, given that the monetary outlook differentials with other central bank policies may widen and even if they remain unchanged they may not be in AUD’s favour. On a more fundamental level, we note that the Aussie, as a commodity currency, tends to be viewed as a riskier investment and may prove to be more sensitive to market sentiment. Hence a more risk-on approach by the market may provide some support for the AUD, while on the contrary, a more risk-averse environment may weigh. On a macro level, we note the widening beyond market expectations of Australia’s trade surplus for August, which was a pleasant surprise for AUD traders and also note the coming release of Australia’s Business conditions and confidence indicators for September as well as consumer confidence for October. Yet the main release of the week may prove to come from elsewhere, as China’s trade data for September are due out on Friday. The main interest of Aussie traders is expected to be placed on China’s import growth rate and a possible improvement could provide some support for AUD, given the Australian exports to China and the close Sino-Australian economic ties.

CAD – Oil prices to swing the Loonie

The Loonie is about to end the week in the reds against the USD yet the US and Canadian employment data for September are still to be released. On the monetary front, we note that the Bank of Canada seems to remain hawkish given the recent comments by Deputy Governor Vincent that businesses are raising their prices more often than before the pandemic and thus contributing to higher-than-expected inflation. Should BoC’s hawkishness be maintained we may see the bank’s stance providing some support for the CAD in the coming week, also given the market’s expectations for a possible rate hike early next year. On a more fundamental level, we note that the drop of oil prices tended to weigh on the Loonie given that Canada is a major oil-producing economy. We expect that should market concerns for the demand side of the commodity intensify in the coming week, given that OPEC’s low production levels are not cut deeper, we may see oil prices weakening further, a scenario that may weigh on the Loonie in the coming week. Furthermore and like the Aussie, the Loonie is also considered a riskier asset, as it is regarded as a commodity currency and thus may prove sensitive to the market’s moods. On a macroeconomic level, we note that the GDP rate of Canada for July got, at least temporarily out of the negative area, reaching stagnation levels, while the country’s trade balance for August, surprisingly turned into a surplus, a positive note for Canada’s economy. The worrying part may have been economic activity in the manufacturing sector which tended to contract even more in the past month. We note the release of the building permit growth rate for next week, yet other than that it’s expected to be a rather quiet week on the macroeconomic front, a scenario that may allow fundamentals to take the lead regarding the CAD’s direction.

General Comment

In the coming week, we expect that the USD may gain additional influence in the FX market as the gravity of US financial data and monetary policy events seems to outtrump releases from other countries. As for US stockmarkets we note the dive of the Dow Jones, yet at the same time we would like to note the divergence in the behaviour of Nasdaq. We expect market attention to be increased for US stockmarkets in the coming week as the earnings season is about to begin. We note the release of the earnings reports of PepsiCo (#PEP) on Tuesday and the banking sector’s Wells Fargo (#WFC), JP Morgan (#JPM) and Citigroup (#C) on Friday. We also note the rise of US yields over the week, a development that may weigh on gold’s price given the rival relationship of the non-interest-bearing precious metal with US bonds. Also, the negative correlation of the USD with gold seems to have been on display in the past few days a scenario that we expect to be maintained in the coming week as well. Next big tests for gold’s price could be set with the release of the US CPI rates for September, given that gold is also used as a hedging instrument for inflation and the release of the Fed’s September meeting minutes.

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