Week Ahead in FX: December Rate Hike Depends on US Jobs Report

Biggest Economic Indicator Could Help Fed Decide if a December Hike is Possible.

Central banks were active in the last week of October. Some of their actions were unexpected like the Reserve Bank of New Zealand that held rates unchanged when a cut was a strong possibility. Other like the Bank of Japan sided with expectations and held stimulus programs unchanged awaiting the end of 2015.

The Federal Reserve held its monetary policy intact in October. No rate hike as expected, but it did surprise the market with a small change in the statement. The inclusion of “whether it will be appropriate to raise the target range at its next meeting” has boosted the chance of a rate hike during the December Federal Open Market Committee (FOMC) meeting. The Fed’s FOMC is a tough act to follow and the Reserve Bank of Australia and the Bank of England will do just that next week.

The RBA will publish its rate decision on Monday, November 2 at 10:30 pm EST. No change to the Australian benchmark rate is anticipated but the RBA is expected to push dovish rhetoric to lower the AUD. The Bank of England will publish its inflation report and interest rate decision on Thursday, November 5 at 7:00 am EST. After being a frontrunner to be the first central bank to hike the BOE has adopted a more patient stance on monetary policy. The minutes released at the same time as the rate will show a vast majority of the Monetary Policy Committee still see the current rate as appropriate with one known dissenter.

After mixed U.S. economic indicators, the latest being the lower than expected advance GDP at 1.5 percent, the Federal Reserve will be looking at an improvement in the jobs report due on Friday, November 6 at 8:30 am EST. The non-farm payrolls report has disappointed since summer even with the constant lowering of forecasts. The September report miss almost put the Fed rate hike out of the 2015 horizon. Only a strong NFP showing will have the market believing in a rate hike after the Fed’s latest timing hint.

Monday, November 2
10:00 am USD ISM Manufacturing PMI
10:30 pm AUD Cash Rate
10:30 pm AUD RBA Rate Statement
Wednesday, November 4
8:15 am USD ADP Non-Farm Employment Change
8:30 am CAD Trade Balance
8:30 am USD Trade Balance
10:00 am USD Fed Chair Yellen Testifies
10:00 am USD ISM Non-Manufacturing PMI
Thursday, November 5
7:00 am GBP BOE Inflation Report
7:00 am GBP MPC Official Bank Rate Votes
7:00 am GBP Monetary Policy Summary
7:00 am GBP Official Bank Rate
7:45 am GBP BOE Gov Carney Speaks
8:30 am USD Unemployment Claims
Friday, November 6
8:30 am CAD Employment Change
8:30 am USD Average Hourly Earnings m/m
8:30 am USD Non-Farm Employment Change
8:30 am USD Unemployment Rate

*All times EST
For a complete list of scheduled events in the forex market visit the MarketPulse Economic Calendar

RBA to Stand Pat as Inflation Drop Not Enough to Force Cut

Last week’s Australian inflation numbers were softer than expected, prompting analysts to increase the probabilities of another rate cut by the Reserve Bank of Australia. RBA Governor Glenn Stevens has held rates for 5 straight meetings at record low 2.00 percent, although it is expected that the central bank will be forced to cut before the end of the year. The AUD has fallen after the user of dovish rhetoric by Governor Stevens and with the help of the FOMC statement that rekindled the possibility of a December rate hike by the Federal Reserve.

The economic data since last meeting has been mixed, but overall points to a growing economy. There is a concern that a rate cut could create a housing bubble, specially in the Melbourne and Sydney markets where prices have skyrocketed fuelled by low interest rates. The RBA has confidence in the regulation in place to avoid rampant speculation, but the central bank is still dependant on the economy improving despite the headwinds from a slowing Chinese economy and further easing from the central banks of Japan and Europe against the backdrop of the Fed’s inaction. All those factors could end up forcing the hand of Governor Stevens before the end of the year.

AUD events to watch this week:

Monday, November 2
10:30 pm AUD Cash Rate
10:30 pm AUD RBA Rate Statement

*All times EST
For a complete list of scheduled events in the forex market visit the MarketPulse Economic Calendar

BOE in No Rush to Lift Rates But Dissent Would Send Positive Signal

The Bank of England (BOE) has held rates unchanged at record low 0.50 percent for 80 consecutive months. Governor Mark Carney has said that although there is a possibility it does not mean a certainty that rates will be higher before the end of the year. The minutes that are released along with the rate statement show only 1 dissenter in the 9 person Monetary Policy Committee which makes it unlikely that the rate hike will come. The situation is similar to the Federal Reserve where even through members are hawkish in their statements, they haven’t exactly followed through with their MPC vote.

The GBP has risen against the EUR given the monetary policy divergence expectations. The European Central Bank easing has kept the EUR depreciated, while the possibility (although Governor Carney reminds us, not the certainty) of a rate hike will keep the GBP bid.

Thursday, November 5
7:00 am GBP BOE Inflation Report
7:00 am GBP MPC Official Bank Rate Votes
7:00 am GBP Monetary Policy Summary
7:00 am GBP Official Bank Rate
7:45 am GBP BOE Gov Carney Speaks

*All times EST
For a complete list of scheduled events in the forex market visit the MarketPulse Economic Calendar

NFP to Decide December Rate Hike Fate

The October FOMC did not have a press conference following it, so the language had to be more carefully crafted as Fed Chair Janet Yellen would not have a chance to explain to reporters while addressing their questions. The two major changes to the FOMC statement from September were the reduction of the emphasis on overseas factors which was changed from a paragraph into a sentence in another part of the document. The second change was the addition of “whether it will be appropriate to raise the target range at its next meeting”. The new line in the statement reads:

To support continued progress toward maximum employment and price stability, the Committee today reaffirmed its view that the current 0 to 1/4 percent target range for the federal funds rate remains appropriate. In determining whether it will be appropriate to raise the target range at its next meeting, the Committee will assess progress–both realized and expected–toward its objectives of maximum employment and 2 percent inflation.

The Jobs component had been the firmest pillar on the U.S. economic recovery argument, but after the summer, it has stumbled over increased expectations. Even before the Fed announced its plans to taper the quantitive easing program, forecasts around employment had become a problem for the Fed. Relying on the headline employment growth and rate that quickly recovered obfuscated the true health of the economy. Even with that knowledge the Fed has not managed the market expectations well as of all 2015 have produced disappointing FOMC meetings as the Fed is not willing to confirm or denny if they will finally raise rates as expected.

The new line in the FOMC statement points to the possibility of a rate hike but as BOE Governor Mark Carney mentioned over the weekend it is not a certainty that the central bank will make a move. That uncertainty has keep the pressure on for several central banks and those that can afford to be patient will, while for other it could mean easing monetary policy sooner rather than later, specially if they were counting on the Fed to make the first move.

The NFP is forecasted to come in at 179,000 new jobs. Last month when higher than 200,000 was expected the jobs report shocked with 142,000 jobs added and to make matters worse the August figures were downgraded to 136,000. The market is now expecting less than 200,000 new jobs for the third time in a row. The fact that the job gains keep coming has reduced the unemployment rate which is now at 5.1 percent and not expected to change.

U.S. Jobs events to watch this week:

Wednesday, November 4
8:15 am USD ADP Non-Farm Employment Change
Thursday, November 5
8:30 am USD Unemployment Claims
Friday, November 6
8:30 am USD Average Hourly Earnings m/m
8:30 am USD Non-Farm Employment Change
8:30 am USD Unemployment Rate

*All times EST
For a complete list of scheduled events in the forex market visit the MarketPulse Economic Calendar

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