RBA, Europe’s inflation rates and the US employment report to move the markets

As the week ends in a prolonged weekend for the US due to the Thanksgiving holiday, we take a peek into what next week has in store for the markets. In the US the presidency transition seems to be smoothening, while in Europe covid worries tend to intensify. At the same time Brexit seems to be weighing on the GBP, while higher oil prices provided some support for the Loonie. Vaccine hopes tended to spur a risk on mood in the market, providing some support for commodity currency AUD. In the monetary front, RBA’s interest rate decision tends to gather some interest, while we also note Jerome Powell’s testimony before the US senate. As for financial releases we note Eurozone’s inflation rates, Canada’s and Australia’s GDP rates, yet the main release of the week is expected to be US employment report for November, with its NFP figure. Also, it should be noted that the risk-on mood of the past week was so intense that prompted a rare simultaneous drop of gold prices and the USD.

USD –US employment report in the forefront

In the US the politics seem to calm down. It was characteristic that Trump accepted that should the electoral college back Biden, he would leave the White House. However, the green light was given earlier during the week for the transition. Biden’s choices for ministers seemed to support market sentiment. Especially the appointment of former Fed Chair Janet Yellen, as head of the Treasury department, spurred a risk on mood in the markets as it seems to confirm the plans for an expansionary fiscal policy of the new government. Overall, there is a feeling of “back to normal” with governing the US, easing market worries somewhat. On the other hand, covid-19 cases tend to remain on high levels, maintaining market worries for the possible adverse effect on the US economic recovery. Vaccine hopes though intensify, and it was announced that distribution could start the day after the FDA provides approval, which is expected to be by mid-December.

On the monetary front the Fed’s minutes of its last meeting were released, yet with little volatility, as recent developments tended to render them rather outdated. In the coming week, we highlight Fed Chair Powell’s testimony before the Senate, on Tuesday, among planned speeches of other Fed policymakers. As for financial releases, we note the ISM PMIs for November on Tuesday and Thursday, while on Thursday we also get the weekly initial jobless claims figure. On Friday we get the star of financial releases for the week, namely the US employment report for November, with its NFP figure.

GBP –Brexit weighs on the pound, again

The pound seems poised to gain against the USD this week, yet a weakening of the sterling on Thursday and today seems to be erasing any gains made. Brexit once again seems to be weighing on the pound’s direction, as negotiations drag on. EU negotiators seem to prepare for another round of talks in London. Despite considerable progress being achieved, the risk of the UK crashing out of the EU without a trade deal in hand by the end of the year persists. It’s characteristic that both sides warned of existing differences on the negotiating table. We expect once again the pound’s direction to be heavily influenced by developments in the Brexit negotiations, in the coming week. UK Finance Minister Rishi Sunak’s plans to maintain high levels of fiscal spending were a step in the right direction in our opinion, given the wide uncertainty for the UK economy, yet seemed to fail to impress traders.

It’s not by accident that BoE Governor Bailey supported the government’s philosophy to support businesses and households through the lockdown. Also the course of the pandemic in the UK is expected to be another risk factor for the direction of the pound next week. Some easing was announced of the lockdown measures, as we mentioned in last week’s report, yet at a local level the measures continue. There is a light calendar for UK releases next week, yet we note the nationwide house prices for November and the PMI readings for the same month.

ΕUR – Pandemic and CPI rates to dominate

Eurozone’s economic and consumer confidence indicators dropped in November, mirroring the pessimistic sentiment intensification by the lockdown measures in the area. Many governments reinforced lockdown measures in order to curb the spreading of the pandemic. It’s characteristic that Germany extended its partial lockdown until at least Dec. 20, while in France restaurants are to be kept closed for even longer. The new steps could also curb economic activity for the month and December, endangering the rebound of Eurozone’s economic recovery.

On the monetary front ECB’s minutes of the October meeting were released and had a clear dovish tone paving the way for more monetary stimulus to come for the area’s economy, in the bank’s possibly in December meeting. Its characteristic that ECB’s chief economist Philip Lane stated that enduring “a longer phase of even lower inflation” would hurt consumption and investment, while also noted that the recovery path is to be long and fraught with risks. For next week we tend to focus on Lagarde’s planned speech on Monday, while other ECB policymakers could generate some interest among EUR traders. As for financial releases we highlight Germany’s and Eurozone’s preliminary HICP rates for November on Monday and Tuesday respectively. Also, the area’s final PMI readings for November and Germanys’ industrial orders growth rate for October could entice traders.

AUD – RBA and financial data to rock the Aussie

The Aussie gained over the past week against the USD and seems poised to end the week higher. In the coming week we expect AUD traders to focus on RBA’s interest rate decision during Tuesday’s Asian session. The bank is widely expected to remain on hold at 0.10% and currently AUD OIS imply a probability of 97.49% for such a scenario to materialise.

After the small rate cut in November, we expect the bank to maintain a wait and see position. Also, after the expansion of the bank’s government bond buying programme by A$100 bln, we expect little if any action for the bank’s QE program. Overall, we tend to see the risks related to the release as tilted to the dovish side, given also the bank’s possible preference for a weaker Aussie. Also note that RBA governor Lowe is scheduled to appear before the Australian Parliament the following day and could create some volatility. However, we tend to focus on the financial releases affecting the Aussie next week as a heavy schedule seems to be laying ahead. Aussie traders are to have an early start on Monday, with China’s NBS PMIs for November, while on Tuesday the building approval growth rate for October and China’s Caixin Manufacturing PMI, are to follow. On Wednesday we note the release of Australia’s GDP rate for Q3 and on Thursday Australia’s trade data for October. On Friday we note the release of Australia’s retail sales growth rate for October.

CAD – Employment data, GDP and oil prices in focus

CAD seemed to get a boost against the USD from the improved trading sentiment as well as the rising oil prices over the past week. We expect that oil prices could continue to provide support for the Loonie, should they continue to rise, given that oil is one of the main export products of the Canadian economy. On the other hand though, we remain worried by the increased covid-19 cases in Canada which despite retreating from Monday’s record highs are still at very high levels.

On the monetary front it should be noted that BoC governor Macklem stated that rates are to stay at very low levels for a very long time and reiterated that the bank’s QE program is to continue until recovery is well under way. Next week, important financial releases for the CAD begin on Tuesday, as we get Canada’s GDP rate for Q3, which is to show the recovery rate for the Canadian economy after Q2’s -38.7% qoq (annualised). On Friday, we highlight Canada’s employment data for November as well as Canada’s trade data for October.

General Comment

Overall the markets are expected to wake up after the Thanksgiving lull and possibly increase volatility in the first days of the week. We could see financial releases regaining substantial ground in trader’s perceptions about where the economy is heading, yet fundamental issues are still expected to play a key role. For the USD, market worries for the path of the pandemic could intensify, possibly creating safe haven inflows for the USD. It remains to be seen whether Americans travelled for the holidays and contributed to the spreading of the disease. On the other hand, should hopes for a vaccine intensify further we could see a more risk on mood prevailing in the markets. Across the Atlantic, in the UK we expect the Brexit negotiations to be even more tense possibly with setbacks for the pound’s direction, before the situation improves, if it improves. The path of the pandemic is expected to play a key role for both the EUR as well as the GBP. On the other hand, should market sentiment improve, we could see commodity currencies such as the CAD and the Aussie getting some support.

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