In this article, we will look at how you could profit from this week’s numerous CPI reports. We will also review any other market-moving risk events which will take place during the week.
Last week, the market’s key focus was Brexit with the resignation of 6 members of parliament over the new Brexit plan.
Furthermore, during his visit to the UK, Trump stated that the new Brexit deal would make a UK/US trade deal unlikely.
According to ING, the key focus for Brexit will now be on how Brussels views the new Brexit plan.
ING argue that if Brussels view the plan as ‘unworkable’, then GBP will likely remain pressured.
This week, Brexit will remain a key focus for the market. However, with numerous key risk events scheduled, monetary policy will once again be back in focus too.
- Consumer Price Index. As a measure of inflation, CPI is key to the outlook of future monetary policy within a country. We will see CPI released from New Zealand, UK, EU, Japan and Canada.
- Employment. Another key measure and important data point to monetary policy. We will see the UK and Australia release their latest employment reports this week.
- Fed Chair Powell Testifies. This will be a key event for gaining a greater insight into Powell’s outlook for future policy in the US.
Monday, July 16
New Zealand Consumer Price Index – NZD
Our first key event of the week will be New Zealand CPI for Q2. This event will consist of a quarter-over-quarter and a year-over-year measure.
Q1 CPI in New Zealand printed at 0.5% Q/Q and 1.1% Y/ Y. Considering the RBNZ have an inflation target of 1-3%, current inflation stands right at the RBNZ’s lower bound.
The market expects Q2 CPI Y/Y to improve to 1.6%, bringing the RBNZ close to the centre of its range. The risk here is if CPI disappoints, especially if it falls further and moves outside of the RBNZ’s 1-3% range.
In a note to clients, ANZ stated:
‘The risk that domestic inflation remains sluggish for longer is increasing. The RBNZ will remain cautious until there’s a little more certainty that inflation is increasing in a broad-based, sustainable way.’
Therefore, a disappointing print would likely see NZD weaken across the board. Furthermore, NZD’s fundamental bias may begin to lean more to the bearish side.
A print below 1% for CPI Y/Y would be the best-case scenario for a trade, presenting an excellent opportunity to go short NZD.
On the other hand, if CPI beats expectations, NZD will likely remain well supported. Furthermore, expectations for the next move by the RBNZ to be a hike will remain intact.
Given the importance of New Zealand CPI to the RBNZ, any significant deviation will move NZD. Whether the reaction is sustainable or not though, will depend on how the data influences NZD’s fundamental outlook.
The below chart shows New Zealand CPI Y/Y from Q1 2013 to Q1 2018.
Tuesday, July 17
UK Employment – GBP
UK employment consists of five data points. This means it has the potential to create significant volatility, especially if the data prints mixed.
These five data points are:
- Claimant Count Unemployment Change (June)
- Employment Change (May)
- Unemployment Rate (May)
- Average Weekly Earnings (May)
- Average Weekly Earning Ex-Bonus (May)
As each data point can move GBP, it’s important to determine what the overall bias is before looking for a trade.
If the report is overall positive, GBP will likely be well supported, presenting a long opportunity. Conversely, if the data is overall negative, GBP will likely weaken, presenting a short opportunity.
It’s worth noting that of all five data points, the most important from a fundamental perspective is the Average Weekly Earnings. This is because earnings are an underlying influence on inflation.
Of course, given the current uncertainty surrounding Brexit, it’s key to ensure employment data isn’t overshadowed by Brexit developments. If Brexit continues to influence GBP, for a high conviction trade, Brexit and employment data should support one another.
A clearly positive report along with confidence over Brexit will create ideal conditions for GBP strength. Conversely, a disappointing employment report and Brexit uncertainty will create ideal conditions for GBP weakness.
Fed Chair Powell Testimony – USD
Fed Chair Powell’s testimony will take place over two days. On Tuesday, he will testify before the Senate Banking Committee and on Wednesday, before the House Financial Services Committee.
The testimony will begin with a prepared speech from Powell followed by questions from committee members. As questions are not known beforehand, they can create surprise announcements and market volatility.
Powell’s testimony will provide the market with a greater insight into his current thoughts and expectations. In a recent report note, ING stated:
‘any signs of concern from Powell over the implications for US trade policy could keep a lid on US rates and the dollar’.
Alongside US trade policy, other topics to focus on will be future monetary policy and the economic outlook.
Overall, if the market views Powell as being hawkish with a more optimistic tone, USD should strengthen. Conversely, a dovish and cautious Powell will likely see USD weaken.
Wednesday, July 18
UK Consumer Price Index – GBP
UK CPI is one of the most influential data points for the BoE and monetary policy. The event will consist of four key measures, all for the month of June. These four measures are:
- CPI M/M,
- CPI Y/Y,
- Core CPI M/M
- Core CPI Y/ Y.
Furthermore, this is the last significant data point from the UK before the BoE meeting on August 2nd. According to Scotiabank, the market is currently pricing in an 80% chance of a hike at this meeting.
Therefore, a positive report here may be enough to seal in an August hike from the BoE. Conversely, a disappointing report may see the market reduce its expectations.
Of course, alongside CPI we also need to consider Tuesday’s employment report and Brexit. If CPI contrasts with sentiment from employment or Brexit, any opportunity from CPI will be of a lower conviction.
For the ideal trading opportunity, CPI should support any prevailing sentiment bias ahead of the event. If CPI and sentiment from employment/Brexit contrast, GBP will likely experience volatility.
In this scenario, the trick is to determine whether the CPI report is significant enough to change the prevailing sentiment or not. This will most likely be a case of how CPI influences August rate hike expectations.
EU Final Consumer Price Index – EUR
EU Final CPI will be the final measure of inflation for June. This event consists of multiple CPI releases; however, CPI all items and core CPI will be the most important.
As a quick note, Core CPI in the EU is CPI excluding food, energy, alcohol and tobacco.
Inflation in the EU will be one of the most influential factors as to when the ECB begin hiking rates. Current consensus is for late 2019 although banks such as Scotiabank don’t expect a hike until at least 2020.
The market expects CPI Y/Y and Core CPI Y/Y to remain unrevised at 2.0% and 1.0% respectively. Any significant revision will likely influence EUR.
A positive revision should see EUR supported, presenting a buying opportunity. A downward revision should see EUR pressured, presenting a short opportunity.
If CPI remains unchanged, there will likely be no opportunity.
The below chart shows EU Final CPI Y/Y from June 2013 to May 2018.
Thursday, July 19
Australia Employment – AUD
Australia’s employment report consists of the Unemployment Rate and Employment Change for June. It’s worth noting that Employment Change can be further evaluated by looking at the Full-Time component.
For this reason, this report can create volatility and be misleading if a deviation in Employment Change results from part-time employment. For the ideal trade, any deviation in Employment Change should result from Full Time Employment.
Of course, the Unemployment Rate is equally as important and market moving. Therefore, after completely analysing Employment Change, analyze and compare the Unemployment Rate.
Once again, the ideal opportunity will see Employment Change and the Unemployment Rate support one another. For example, both are positive, or both are negative.
If the data prints mixed, either between Employment Change and Full Time Employment; or Employment Change and the Unemployment Rate, any trade will be of a lower conviction.
Japan National Consumer Price Index – JPY
Japan release two separate CPI reports, National CPI and Tokyo CPI. Tokyo CPI is always a month ahead of National CPI, but Tokyo CPI isn’t due until July 27th.
Of the two reports, Tokyo is the more important as this is a month ahead of National. Nevertheless, National CPI is still important from a fundamental perspective although it’s not typically market moving.
At their last monetary policy meeting, the BoJ stated that CPI was range bound between 0.5% and 1.0%. Therefore, this report will only be significant if CPI can break outside of the 0.5% to 1.0% range.
If this does occur, the market will likely become more focused on the BoJ and monetary policy. However, for as long as CPI remains within this range, it will likely remain a non-event.
Canada Consumer Price Index – CAD
Canadian CPI will be our last high conviction opportunity of the week. This also follows from last week’s BoC meeting where interest rates in Canada increased to 1.50%.
Wells Fargo expects the BoC to announce one more hike this year. Whether this is the case or not, will be largely influenced by how inflation develops going forward.
Of course, there are other factors to consider, most notably NAFTA. This is worth noting as Scotiabank suggest it’s likely that NAFTA headlines will return this week.
Therefore, whether Canadian CPI presents an opportunity or not will not only depend on the data but whether NAFTA overshadows it.
Positive NAFTA developments and a positive CPI report will provide a great CAD long opportunity. Conversely, negative NAFTA developments and a disappointing CPI report will provide a great short opportunity.
If NAFTA developments and CPI contrast with one another, any opportunity from CPI will be of a lower conviction.
The below chart shows Canadian CPI Y/Y from June 2013 to May 2018.
With numerous data points this week, there should be plenty of opportunities to trade and hopefully make pips. Of course, it’s important to not only consider the data but also external developments.
In the case of UK data and GBP, it will be important to consider Brexit. For Australia and AUD, US/China trade war developments will be key while NAFTA is key for Canada and CAD.
With multiple CPI reports this week, monetary policy will undoubtedly be in focus. This is important to consider for current opportunities but also to re-evaluate each currency’s fundamental outlook.
The goal of this article is to help you improve your understanding and ability to trade risk events. If you would like to learn more about risk event trading, please type your question in the comments below.