FX WEEK AHEAD OVERVIEW:
- The September Fed meeting on Wednesday is the most important central bank meeting of the week; on Thursday, the Bank of Japan may wait longer to enhance its easing measures and the Bank of England will remain on hold until there is clarity around Brexit.
- The antipodean currencies are in focus this week, with the Q2’19 New Zealand GDP report and the August Australia jobs report due between Wednesday and Thursday.
- Retail trader positioningsuggests that the US Dollar be facing a choppier trading environment in the runup to the September Fed meeting.
09/18 WEDNESDAY | 12:30 GMT | CAD Consumer Price Index (AUG)
Volatility in energy markets during August likely can be blamed for any near-term downswing in price pressures, as the upcoming Canada inflation report will show. At approximately 11% of GDP, the energy sector and therefore the performance of oil prices tend to have outsized influences on Canadian economic data.
Accordingly, a Bloomberg News survey’s consensus forecasts suggest a softening in price pressures. Headline August Canada inflation due in at 1.9% from 2.0% (y/y), while the monthly reading is due in at –0.2% from 0.5% (m/m). It still holds that movement in energy markets will guide the Canadian Dollar and inflation all the same.
BANK OF CANADA INTEREST RATE EXPECTATIONS (SEPTEMBER 13, 2019) (TABLE 1)
Now that the US-China trade war is in a state of truce, G10 currencies’ central banks have seen their easing expectations drop in recent weeks; the Bank of Canada is no different. As such, soft inflation data may be otherwise dismissed. Traders should keep expectations low for a policy change from the Bank of Canada any time soon; the odds for additional stimulus have moved sharply lower in recent weeks. Four weeks earlier, overnight index swaps were pricing in only a 66% chance of a 25-bps rate cut in October; now, odds of an October rate cut are 10%.
09/18 WEDNESDAY | 18:00 GMT | USD FEDERAL RESERVE RATE DECISION AND PRESS CONFERENCE
The truce in the US-China trade war has provoked a sharp repricing of Fed rate cut expectations ahead of the September Fed meeting. Even though Fed Chair Jerome Powell has said in recent months that the Fed would “act as appropriate” if needed, the dramatic rise in US Treasury yields suggests that there is a strong feeling among market participants that the Fed will not be as aggressively dovish when it meets this coming Wednesday.
FEDERAL RESERVE INTEREST RATE EXPECTATIONS (SEPTEMBER 13, 2019) (TABLE 1)
Now, Fed funds futures continue to price in a 100% chance of a 25-bps rate cut at the September Fed meeting. Odds of a 50-bps rate cut have rebounded since Thursday, September 12 (a 25-bps rate hike is no longer more likely than a 50-bps rate cut). Meanwhile, odds of another 25-bps rate cut by December have dropped to 68% – down from 76% on Thursday, September 12.
FX TRADING RESOURCES
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— Written by Christopher Vecchio, CFA, Senior Currency Strategist
To contact Christopher, email him at email@example.com