RBA and the Fed to move the markets

With the US employment report for March still due out as these lines are written, the FX week is still far from being over despite being Friday. Nevertheless, we take a sneak peak into what next week has in store for the markets. On the monetary front, we highlight RBA’s interest rate decision on Tuesday, while on Wednesday we get the minutes of FOMC’s last meeting and on Thursday Fed Chairman Powell’s speech could also generate some interest among traders. On the fundamental side, we intend to keep an eye out on the speed of the US economic recovery, as well as any news regarding the progress of the US vaccination program. In Europe, we tend to highlight the path of the pandemic as the key fundamental issue for the common currency, while for the GBP the pace of the UK economic recovery and for AUD the US-Sino relationships and any tensions that may arise. As for financial releases, we have a rather light calendar ahead with possible highlights including the US ISM non-manufacturing PMI for March on Monday, the final UK services PMI for March on Wednesday, the US weekly initial jobless claims figure on Thursday and finally on Friday Canada’s employment data.

USD – Fed’s minutes in the epicenter

Fundamentally the USD could be affected by the pace of the recovery of the US economy. With Biden’s $2 trillion infrastructure plan out, some of the market’s worries may have been laid to rest, given the wide injection of cash in the US economy over the next years. The recovery of the US economy may speed up, while such a stimulus may raise inflationary pressures in the coming years as well. Such expectations may force the Fed to act sooner than the 2023 as anticipated and could drive the US yields higher. On the monetary front, the release of the minutes of the FOMC’s last meeting is expected to be the main event. The document is to be scrutinized by analysts and other market participants on how dovish the bank actually is, given that the Fed’s Chairman recognised that the US economic recovery “has progressed more quickly than generally expected and looks to be strengthening”, which may allow for an earlier tightening of the Fed’s monetary policy in some way in our opinion. It should be noted that the Fed’s Chair is scheduled to speak on Thursday and should he sound somewhat more hawkish the USD could get some support on the possibility of the bank tightening somewhat earlier its policy. As for financial releases, from the US we highlight the factory orders growth rate for February and the ISM non-manufacturing PMI on Monday, while on Thursday we get the US weekly initial jobless claims figure.

GBP – Pound traders being more optimistic

The pound edged higher against the USD, CHF and JPY while remained relatively stable with little losses against the common currency yesterday. The positive financial data released lately from the UK may have contributed to the positive sentiment for the pound, given that the final manufacturing PMI for March was better than expected, while the GDP rate for Q4 released on Wednesday also outperformed market expectations. Fundamentally the fast pace of UK’s vaccination program along with an easing of the UK lockdown measures may have improved the climate for the GBP, given also that the public opinion for the UK government has turned positive, while UK businesses are reported to be more optimistic. As for financial releases we highlight on Wednesday, March’s final Composite and Services PMI readings, with the latter gaining further importance as a wide proportion of the UK economy is based on the services sector. On Thursday we get the construction sector’s PMI reading for March, while on Friday we note the Halifax House prices for the same month.

JPY – Safe haven flows to move JPY

Cherry blossoms blumed early this year in Japan, yet the situaiton seems a bit more perplexed in the land of the rising sun. Market sentiment seems to be rather positive given that the Japanese stocks tended to rise yesterday yet JPY’s weakening against the greenback seems to have reached a halt for the time being. On the Covid front, Osaka and two other prefectures were allowed to take stronger measures to fight the pandemic, yet without an emergency declaration, while some analysts were quick to note that Japan may be on the brink of a 4th wave. In the political stage, the meeting between Japanese Prime Minister Suga and US president Biden next week seem to be dominating the headlines, with the main issue discussed, expected to be North Korea. On the monetary front we note BoJ Governor Kuroda’s slightly upbeat view regarding growth in Japan and globally, yet at the same time we also note his comments that BoJ will continue to buy ETF’s as needed with a close eye on market developments which is indicative of the bank’s dovish stance. As for financial releases we note on Tuesday the all household spending growth rate for February, while on Thursday we get Japan’s current account balance for the same month. Overall though we expect the Japanese currency to be more sensitive to the market sentiment and any possible safe haven flows, due ot its dual nature as a national currency and a safe haven at the same time.

EUR – Pandemic still in focus

The situation with Covid in Europe is still worrisome, given that the number of new cases is still on the rise in Germany and France, the two largest economies of the zone. It’s characteristic of the criticality of the situation that Germany is even considering breaking ranks from EU’s common purchases plan, regarding booster vaccines in the future. At the same time the pandemic also has ripple effects in the German political scene where the German government is facing a drop of approval ratings according to a recent survey. The situation is important given that its an election year in Germany and Merkel is not to be a candidate. At the same time France is entering a third national lockdown on Sunday effectively, without the French Presidnet Macron actually naming it so. On the monetary front, Lagarde’s comments that the ECB will use all its powers should investors try to push bond yields higher, underscored the bank’s dovish stance. As for financial releases after the confirmation of the stellar rise of Germany’s manufacturing PMI for March on Thursday, we highlight Eurozone’s final Services and Composite PMIs for March on Wednesday, yet before that on Monday we get Eurozone’s forward looking Sentix index for April. On Thrusday and Friday we get Germany’s industrial orders and industrial output growth rates for February, respectively, while on Friday we also get Germany’s trade data and current account balance for February.

AUD – RBA in the epicenter

It seems that its going to be the third consecutive week of losses for the AUD against the USD this week. In the coming week we expect that Aussie traders could focus on the release of RBA’s interest rate decision. The bank is widely expected to remain on hold at 0.10% and AUD OIS imply a probability of 98.5% for such a scenario to materialise. We expect the bank to maintain its dovish tone in Governor Lowe’s accompanying statement, and we would not be surprised to see the bank reiterating that it will “not increase the cash rate… until 2024 at the earliest”. Overall we maintain a view of the risks associated with the event as skewed to the downside for the AUD currently. On a fundamental level we would hihglight the risk of a possible further escalation in the relationships of the US with China, as well as between Australia and China. As for financial releases we have a rahter light calendar with China’s Caixin Services PMI reading for March on Tuesday, albeit probably being overshadowed by RBA’s interest rate decision, while on Friday, we get China’s inflation measures for March.

CAD – Employment data eyed

The CAD has had some slight gains against the USD this week, mostly due to better than expected data. Canada’s month-on-month GDP rate showed faster growth for January than expected, reaching 0.7%mom which cheered CAD traders. Also an improvement of the market sentiment tended to support the commodity currrency at some points through the week. BoC Governor Tiff Macklem, in an interview, stated that he saw worrying signs that household debts are rising as housing prices continue to surge. The issue may pose a dilemma for the BoC as the rising house prices push the bank towards a less dovish policy, yet a possible hiking in the future may burden house loan holders even more. Analysts tend to note that BoC could be among the first central banks to taper asset purchases, thus tightening in a sense its monetary policy.On the other hand, oil prices maintained a rather sideways motion, despite OPEC+ group lowering its demand outlook, which seems to have had a rather low impact on oil prices. As for financial releases on Wednesday, we get Canada’s trade data for February and the Ivey PMI reading for March. The main release of the week for Loonie traders though may prove to be Canada’s employment data for March, which are due out on Friday.

General Comment

We expect fundamentals along with monetary issues to be in the forefront, given also the low number of high impact financial releases. Also, it should be noted that on a fundamental level the US issues may keep the initiative, yet local issues are also to influence their own currencies. Hence USD’s dominance could still be present, yet could also be slightly weaker, allowing for the FX market to be more multipolar for the coming week. Besides the FX market we must note that US stockmarkets seem to be in a state of slight euphoria after the announcement of Biden’s $2 trillion infrastructure spending plan, with the ripple effects spreading to some degree to other countries as well. On the other hand, US yields seem to have paused their ascent yesterday, yet should they regain momentum and start rising we may see the stock-markets weakening, with special weight being placed on the tech sector. At the same time such a development could also weaken gold’s prices, as the opportunity cost for gold bearers could be enhanced and the USD could strengthen.

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