Week Ahead Currency Outlook For November 2-6 – Upcoming Economic Data Review, Foreign Exchange Rates, Analysis And Forecasts – Exchange Rates UK

Are we beginning to see economics returning to the FX market? Until recently it’s been pretty much a “risk on, risk off” market, dominated by a few trades when it looks like the US and China will solve their problems (buy AUD & NZD) or the dispute will worsen (buy JPY). But what I’ve noticed this week is that as new economic data comes in at variance with people’s expectations, currency values are readjusting to take into account the new information. The Citi economic surprise indices show mainly that US economic data is surprising on the upside, while Eurozone and UK data are increasingly disappointing. Japan data is surprising on the upside too, but less and less.

The result has been a generally strengthening dollar. Meanwhile, the more disappointing a country’s indicators were, the more its currency depreciated against the USD.

The big exceptions were GBP and NZD. Looking just at the economic surprise indicator, GBP should’ve been down some 0.75% vs USD this week, not up slightly. That’s obviously due to Brexit. The respected pollster YouGov released a poll showing that the Conservatives are not only in the lead, but on course to win a solid majority of 33 seats in the 12 December General Election. That means Brexit on schedule on 31 January on the terms negotiated by PM Johnson – terms that Johnson himself said “no British Conservative government could or should sign up to1,” but never mind.

“We would be damaging the fabric of the Union with regulatory checks and even customs controls between Great Britain and Northern Ireland on top of those extra regulatory checks down the Irish Sea that are already envisaged in the withdrawal agreement,” Johnson said at the Democratic Unionist Party (DUP) convention in 2018. “Now, I have to tell you that no British Conservative government could or should sign up to any such arrangement.”

As for NZD, most of the gains were in the first few hours of trading Monday morning, presumably on hopes for the US-China trade talks. Some further gains happened Wednesday morning New Zealand time, when the Financial Stability Review came out. But as you can see, contrary to the experience of GBP, NZD’s gains were much less than what would be expected given the improvement in its economic surprise index (probably boosted by a much better-than-expected Q3 retail sales figure on Tuesday). The ANZ activity index, which came out Thursday, also showed a big improvement (no forecasts available).

Market estimates of a rate cut have receded somewhat, but not significantly.

I think NZD can make further gains, based on its surprisingly good economic outperformance.

It’s noticeable that AUD/NZD has come down steadily for most of the week. This is the only thing that gives me pause – there could be some profit-taking on this trend on Friday. But AUD is bound to weaken when the Governor of the central bank starts thinking out loud about what it would take to get him to use quantitative easing and negative interest rates.

The coming week: NFP, RBA, Bank of Canada

Being the first week of December, it’s time once again for the US nonfarm payrolls (NFP). It’s interesting to me that this indicator still attracts so much more attention than the personal consumption expenditure (PCE) deflator that we had out on Wednesday, even though the Fed is supposed to be focused on inflation.

If you’re interested in trading around the NFP, which currency pair should you use? USD/JPY sees the greatest increase in volatility on NFP days. That and NZD/USD get the biggest boost (along with precious metals).

But even USD/JPY has been seeing a below-average range for the last several NFP days. (It’s even worse for EUR/USD) Perhaps the NFP isn’t as big a thing as it was before.

Or maybe economists are just getting better at forecasting it, meaning there’s less of a surprise when it does come out. That’s been the case for the last few months.

The market is looking for a substantial 190k increase in payrolls. This would be well above the six-month average of 143k. I assume this is predicated on a) people laid off from GM going back to work, and b) more temporary hiring of census workers. If a rise like this were to happen without such special factors, it would be extremely USD bullish.

Personally, I think the average hourly earnings figure is even more important. We’re already well beyond what the Fed considers to be full employment (around 4.2%). What the Fed wants to see is a tight labor market feeding through to higher wages. So far, not much sign of that. The recent Beige Book noted that “Moderate wage growth continued across most Districts. Wage pressures intensified for low-skill positions.” This month, the average hourly earnings figure is expected to show no change in that trend. While the mom rate of change is forecast to pick up, the yoy rate is expected to stay at 3.0% for the third consecutive month. USD neutral.

There is only one Fed speaker this week: Fed Vice Chair Quarles testifies to Congress on banking supervision and regulation. He almost surely won’t say anything about monetary policy, because the Fed is in its “blackout” period this week ahead of the 11 December FOMC meeting, during which time FOMC members aren’t allowed to make any pronouncements on that topic.

Central bank meetings: no change now, maybe next year

There are two central bank meetings in the coming week: the Reserve Bank of Australia (RBA) and the Bank of Canada (BoC). Neither is expected to cut rates this week, but the market sees a good chance – indeed, a high probability – that the RBA will next year. BoC? Not so sure.

The RBA meets 11 times a year (only skips a meeting in January) so there usually isn’t that much change in the Australian economic situation between meetings, although the fact that much of their important data only comes out quarterly does give some meetings more importance than others. What we did have of interest this time was RBA Gov. Lowe’s speech on “Unconventional Monetary Policy: Some Lessons From Overseas.” The lessons we learned from that are:

1. Australia has not yet reached the “threshold for undertaking QE,” or quantitative easing.
2. The RBA’s “current thinking is that QE becomes an option to be considered at a cash rate of 0.25 per cent.” (It’s currently 0.75%)
3. If they decide to do QE, it will be by buying government bonds. “We have no appetite to undertake outright purchases of private sector assets as part of a QE program.”
4. Negative interest rates are “extraordinarily unlikely.”

As you can see, the odds of rates staying unchanged until next June plunged while the odds of two or more cuts jumped after his speech, mostly because the odds of three rate cuts rose to 11% from 4%. Still, no scenario has even a 50% probability – the market is undecided. The odds of a rate cut at the current meeting are considered low (only 12%), but that jumps to 66% by the time the next meeting rolls around in February, and it’s 75% by April. Until then, we have to monitor growth, employment and inflation in Australia and see how they’re going. With the unemployment rate moving upand inflation well below the RBA’s target bandanother rate cut seems an eventuality. But not this week. AUD neutral.

The Bank of Canada is not such a sure thing. The market sees a very low (3.8%) possibility of a rate cut at this meeting, but is quite unsure about what happens after that. Unchanged, one cut or two cuts – they all seem almost equally possible in the first half of next year. The BoC said it would “pay close attention to the sources of resilience in the Canadian economy – notably consumer spending and housing activity – as well as to fiscal policy developments” in making its decisions.” In that case, the signs aren’t great, but aren’t yet urgent. Retail sales are rising, although at a slower pace.And housing starts have held up so far even though house prices are stagnant.The big difference with Australia is that in Canada, all the important measures of inflation are right around the center of the BoC’s target range. There’s no urgency from an inflationary point of view to make any change in rates. The question then is whether the nation’s economy is likely to slow enough to push inflation out of that range – and that will take more time to see. CAD neutral

Other indicators: PMIs, ISM, German IP

There will be a number of other important indicators out during the week that will speak to the health of the global economy. Overall the figures are expected to show that manufacturing has passed the bottom and is at least stabilizing, if not expanding. The final purchasing managers’ indices (PMIs) for the major economies will come out, together with the PMIs for the rest of the countries that haven’t announced theirs yet. Manufacturing is on Monday, service-sector on Wednesday. This includes the closely watched indices from the US Institute of Supply Management (ISM), the original makers of the PMIs. The ISM manufacturing index is forecast to bounce back up, as did the Markit version of that index, but the ISM is expected to remain below the 50 “boom or bust” line. The question is whether the market focuses on the direction (USD-positive) or the number itself (USD-negative). Given the mixed picture here, I suspect it will depend more on how big a surprise this indicator has. German factory orders and industrial production are both expected to be down from a year earlier, but somewhat more moderate contraction than in the previous month. This may confirm the growing narrative that the worst is over for German industry and that it is likely to recover gradually from here. That could be positive for EUR.