How To Make Pips From Monetary Policy This Week

There have been a lot of geopolitical drivers in the markets lately. It seems like majority of the market’s focus has been things like on Trade Wars, Brexit and Nafta. 

This week has been slightly different though. Attention turned back to good old monetary policy for a change. 

In this week’s article we’ll be looking at: 

  1. What moved the markets last week
  2. What events are important in the week ahead
  3. Trade ideas for the week ahead

United States 

What Happened Last Week? 

The market was quiet during the build up to last week’s FOMC rate decision on Wednesday 26 Sep. 

As expected, the FED hiked interest rates with another 25 basis points. This has brought the Fed Funds rate to 2.00-2.25%.

The FED’s updated dot plot showed no changes to the current rate hike projections. However, the dots for 2021 match the ones for 2020 which shows the FED might intend to stop hiking in 2020. 

The FOMC removed the word “accommodative” from their monetary policy statement. This was initially seen as a dovish change which pressured the dollar. 

However, after FED chair Powell had a hawkish tone the dollar gained strength again. The Dollar remained bullish for the remainder of the week. 

ING explains that the upward revision for GDP in the FED projections point to solid growth ahead. 

In terms of Trader War, not a lot happened this week on the trade front. The latest development was Trump accusing China of interfering in the US elections. 

Reuters reported that a simulation by the ECB showed that the US would have most to lose in the ongoing trade war.

So far, the US has been very confident in their ability to win any large-scale Trader War. 

For now, the market seems more resilient to trade war concerns. However, further escalation could bring the focus back quite soon. 

The Week Ahead 

There is quite a lot of data on the calendar for the USD this week. According to ING, the key data will be the latest labour and ISM reports. 

First up is ISM Manufacturing on Monday. Expectations are for a slight drop to 60.3 from 61.3. Thursday’s ISM Non-Manufacturing PMI is also expected to slow to 58.1 from 58.5. 

ING states some September data points might come in soft due to hurricane Florence. 

On Friday we have one of the biggest market moving events in the Forex calendar. You guessed it, it’s Non-Farm Payrolls of course. 

The market’s first reaction will probably come from the headline payrolls number.

Current expectations are for the US to have added 185k jobs in September which is down from 201k in August. 

Even more important than the jobs numbers will be the average hourly earnings data.

Average earnings MM is expected to slow from 0.4% to 0.3% and average earnings YY to drop to 2.8% from 2.9%. 

Trade Ideas 

The dollar made significant gains on most of the major pairs last week. For this reason, we would like to see the market correct from the lows before looking for further USD trades. 

That being said, Friday’s labour data should provide ample volatility in the market. Expectations are for softer labour data so watch out for short term opportunities. 

Any possible short term pressure on the USD from soft labour data won’t change the FED’s mind. The longer-term fundamentals are still bullish on the dollar. 

Scotiabank explains that there is a slew of FED speakers on the wires this week. No fireworks are expected from these speeches, but we need to be aware of them in case of unexpected news. 

United Kingdom 

What Happened Last Week? 

We’ll give you one guess where the market’s focus was for the pound last week? The answer is Brexit of course. 

The Pound took quite a hit the week before following a hardline speech from PM May to the EU. However, at the start of the week the GBP recovered surprisingly well. 

On Wednesday Jeremy Corbyn called for a snap election if MP’s voted down PM May’s Brexit plan. Corbyn also said they are keeping the possibility of a second referendum on the table. 

The Guardian reported that the EU were stepping up their preparations for a no deal Brexit. 

A warning from the British National Farmers Union went largely unnoticed. They warned that UK farmers face a six-month certification hurdle in a no deal Brexit outcome. 

Warnings like this will probably increase as we get closer to the March 2019 when the UK will leave the EU. 

The British government is hard pushed from many sides to make a deal. According to ING, they still think the highest probable outcome is for the UK and EU to close a deal in the end. 

In terms of Economic Indicators, the only release of note was GDP QQ and GDP YY.

The GDP QQ release came out as expected at 0.4%. While the GDP YY missed, coming in at 1.2% versus a minimum expectation of 1.3%. 

With the ongoing focus in the market being on Brexit there was not a lot of reaction following the UK GDP release. 

The Week Ahead 

In terms of data, we will have the Manufacturing, Services and Construction PMI’s this week. The PMI for Manufacturing is expected to slow to 52.5 from 52.8 and Construction PMI anticipated to drop to 52.5 from 52.9. 

The most important of the three releases is the Services PMI which is also expected to slow to 54.0 from 54.3 in August.

Services consist of close to 80% of the UK’s economy which is why it’s the most market moving of the three PMI’s. 

By far the most important thing this week will be the Conservative Party Conference. The conference will run from Sunday 30 September and conclude on Wednesday 3 October. 

This event is sure to move markets this week. Especially, since a challenge on PM May’s leadership at the conference has not been ruled out. 

Trade Ideas 

Danske Bank expects everything to be about UK politics this week. Any potential leadership challenge on May or Brexit talk can cause volatility. 

Have your news squawk on and ready to take advantage of any headlines coming out of the conference. 

In normal circumstances the PMI’s would have offered great trading opportunities. However, we expect moves resulting from the data to fade and take a back seat as all focus is set on politics. 

Euro Zone 

What Happened Last Week? 

Earlier in the week the Euro jumped to its highest levels since June. The catalyst was remarks by Mario Draghi who said he saw a vigorous pick up in core inflation. 

Why did the market react to these remarks? Inflation, especially core inflation remains the biggest focus for the ECB. 

The ECB will not be able to hike interest rates until core inflation moves closer to their 2% target. However, the EUR rally was short lived as Italian politics took center stage once again. 

The Italian budget brought a lot of pain on the Euro in the latter part of last week. The EUR tumbled on Friday as concerns over Italy’s new budget sent Italian yields up 35 basis points. 

One of the reasons for the big decline was due to the deficit target which came in higher than expected. Finance minister Giovanni Tria pushed for a 1.6% deficit to GDP target for 2019. 

This would have been a more acceptable number for the EU to accept. Yet, politics beat fiscal strictness as Tria agreed to a higher target of 2.4% for 2018. 

The latest release of the EUR CPI numbers just exacerbated the drop in the EUR.

Headline inflation stayed flat at 2.1%, but the more important Core CPI came in softer at 0.9% versus expectations of 1.1%. 

The graph below shows that core inflation has been very sluggish for a long time and is nowhere near the 2% target. 

The above picture of Core CPI makes the remarks made by Mario Draghi even more surprising. 

The Week Ahead 

In terms of politics, look out for any further news from Italy or the EU regarding the new proposed budget. 

There is a very good chance that the EU will push back on the proposed Italian budget. Especially since certain EU members has already started commenting negatively towards it. 

We expect any push back from the EU in the week ahead to throw fuel on the fire so to speak. Also, further strength in the dollar will also continue to weigh on the EUR due to its weight in the DXY. 

When it comes to data the calendar is very soft this week. The week will see a flurry of final PMI numbers, but no fireworks are expected from these. 

Trade Ideas 

Danske Bank expects all focus to remain on the Italian budget and the EU’s response towards it.

Look out for any news announcements or comments from the EU about the Italian budget deficit. 

Keep the news squawk ready to take advantage of possible good or bad news.  

Canada 

What Happened Last Week? 

The Canadian dollar suffered on Wednesday due to NAFTA concerns and FOMC fallout. 

CAD pressure started when it was reported that the US planned to issue the text of a trade deal with just Mexico.

It also didn’t help that Robert Lighthizer said the US was ready to go ahead without Canada. 

During the UN, Pres. Trump also stated that the US was not getting along with the Canadian negotiators.

Trump also said if a deal cannot be signed with Canada that the US will impose tariffs on Canadian autos. 

The bullish dollar following the hawkish FOMC also added to the CAD’s pressure. 

The CAD’s outlook improved Thursday with PM Trudeau stating a good deal is still possible. On Friday Governor Poloz reinforced expectations of an October interest rate hike. 

Poloz explained higher interest rates will be warranted to achieve their inflation target. The latest Canadian GDP release also beat expectations at 0.2% versus a forecast of 0.1%. 

A further boost came in late on Friday when Mexico said they will insist NAFTA remain a trilateral deal. 

All of this caused significant gains for the CAD as it ended the week roughly where it started versus the USD. 

The Week Ahead 

The main event for the week in terms of economic data will be jobs report for Canada. The previous jobs reports in August had a big miss of 51.6k. 

Interestingly the report wasn’t bad considering that full time employment added 40k jobs. Scotiabank states employment changes are only significant if it affects full time jobs. 

Currently the market is expecting 24.7k jobs were added in September. Also, forecasts are for the Unemployment rate to stay flat at 6.0%. 

CAD employment numbers can be erratic from month to month. Despite that the overall employment situation looks very positive for Canada

The Unemployment rate is at levels last seen before the 2007 Financial Crisis. Overall a very positive picture for the Canadian economy. 

Trade Ideas 

As usual, look for any possible Nafta headlines to take advantage of short term moves. 

In terms of employment data, any big changes in full time employment should be market moving. Remember to evaluate the current Nafta sentiment before taking trades based on data. 

Australia 

What Happened Last Week? 

Last week was a fairly quiet week for the Aussie dollar due to a lack of significant data points. 

With no further significant trade war developments the risk correlated AUD remained quiet. 

The Week Ahead 

In this week the calendar looks much more exciting. On Tuesday the RBA will have their rate decision and accompanying rate statement. 

Scotiabank explains that the RBA’s rate decision is not much of a mystery. The RBA is widely expected to stay on hold until the end of 2019. 

According to ING, domestic data has been strong since the last RBA meeting in September. The latest GDP YY came in strong at 3.4% versus expectations of 2.8%. 

Latest employment data also beat forecasts adding 44k jobs versus consensus of 15k. So, what is keeping the RBA back from hiking rates? 

The answer is inflation of course. Below is an example of the current AUD CPI YY versus the RBA inflation target. 

Wells Fargo states that the current AUD CPI reading of 2.1% is right at the bottom of the RBA’s target range. So, even though growth and employment are solid, inflation is still far away. 

Also, on the calendar will be Wednesday’s Building Approvals and Friday’s Retail Sales. Markets expect Building Approvals to increase to 1.0% from -5.2%. 

Retails Sales MM are also expected higher at 0.2% versus prior of 0.0%. 

Trade Ideas 

The RBA and Retail Sales MM are expected to be the main drivers for the AUD in the week ahead. 

Look out for any big beats and misses to take advantage of with Building Approvals and Retail Sales. 

The AUD has been resilient towards the global trade concerns after the last round of tariffs. However, keep it in the back of your mind when considering trading opportunities. 

New Zealand 

What Happened Last Week? 

The RBNZ had their rate decision and released their latest monetary policy statement. 

According to BNZ, the market’s reaction towards the OCR decision was muted as a hold was so surprise. There was little change in the policy statement. 

The RBNZ stuck to their phrase that the next move in the OCR could be up or down despite a recent beat on GDP. 

A bigger reaction was seen following the release of the September Business Outlook. We highlighted the importance of this release in last week’s risk events article. 

The previous Business Outlook dropped to a decade low of -50.3. Markets reacted positively when the latest release came in less bad at -38.3%. 

At -38.3% it is still very low, but in trading ‘better or worse matters more than good or bad‘. 

The Week Ahead 

According to ING, the calendar is very light for the NZD next week. However, the latest release of the GDT dairy auction might move the markets. 

ING further explains the reason for this is that dairy prices has dropped a whopping 14% since June 2018. A further drop may provide a good trading opportunity. 

Monday will also see the NZIER Business Confidence for quarter 3. With no other market moving data the release could provide some trading opportunities. 

Trade Ideas 

Look out for the release of the GDT dairy auction on and the NZIER Business Confidence on Tuesday. 

An unexpected beat or miss on these two could be enough to move the NZD. 

As the NZD is considered a high beta currency, take heed of drastic changes in risk sentiment. 

Japan 

What Happened Last Week? 

The Yen was pressured for the most part of last week. ING says it was due to ‘quarter-end flows, dollar funding needs and an unwind of safe-haven bets’. 

According to ING, the recent Yen weakness is only transitory and expects it to fade. They state recent data such as retails sales and Tokyo CPI has been strong. 

The Week Ahead  

Monday will see the release of the Q3 Tankan survey. Wells Fargo explains that it’s one of Japan’s most closely followed economic releases. 

On Friday we’ll see the Average Cash Earnings YY for August. Not really expecting this to be market moving but big deviations might get attention. 

Trade Ideas  

According to Danske Bank, the Tankan survey have shown decelerating activity this year. Thus, being an important economic measure might see some reactions from big deviations. 

Also, as the Yen is a safe haven currency watch out for sudden risk sentiment changes in the market. 

Switzerland 

What Happened Last Week? 

The Swiss Franc was one of the biggest laggards last week, dropping nearly 2%. 

This happened despite the Italian budget issues and Brexit uncertainty. The CHF lost ground on all pairs on Friday expect versus the EUR. 

We know the SNB is willing to intervene in the FX markets if the CHF appreciates too much. 

This could have been one of the reasons why the CHF sold off across the board. 

Keep this in mind when planning any CHF trades. 

The Week Ahead  

A very thin week in terms of economic data for the Swiss. There is Retail Sales YY on Monday. 

The more important data point for the week will be Swiss CPI numbers on Friday. CPI MM are expected to pick up to 0.2% from 0.0%, while CPI YY is forecasted to slow to 1.1% from 1.2%. 

However, ING states that data for the Swiss rarely has impact on the market. The biggest driver for the Swiss remains its safe haven status. 

Trade Ideas  

At the moment, we do not see any clear opportunities with regards to the CHF. 

Also, as the Swiss Franc is a safe haven currency keep risk sentiment in mind when considering trades. 

Wrap Up 

The highlights of the week in terms of data will be US NFP, Canada jobs report, AUD rate decision and UK PMI’s. 

With regards to geopolitics, highlights are UK political developments and Italian budget concerns. Also remember to keep Nafta in mind as well. 

Make sure to have your news squawk on and ready to jump when the opportunity presents itself. 

Feel free to leave any comments or questions below. 

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