inflation-this-week

Market Focus Turns To Inflation Data This Week

The main events last week came from monetary policy meetings. Focus in Forex markets will turn to inflation in the week ahead. 

The major events for this week will be CPI and Retails Sales for the US and UK. Recent political influences are still in focus as well. 

In this article we’ll go through important events that happened last week. We will also discuss events to look out for in the week ahead along with some trade ideas.   

Below are the currencies we will discuss in this week’s article:  

United States Dollar
Canadian Dollar
Great British Pound
Australian Dollar
New Zealand Dollar
Euro
Japanese Yen
Swiss Franc

 United States Dollar

What Happened Last Week 

The USD kicked off last week on the back foot. This was surprising given the stellar employment report the previous Friday. 

On Monday we had the October release of the ISM Non-Manufacturing PMI. The prior release of 61.6 was the second highest on record from 1997. 

The release was a beat at 60.3 versus expectations of 59.3. This showed that the US is expanding well above trend. 

On Tuesday 6 November we had the US mid-term elections. 

Consensus was for the Democrats to win the House and the Republicans to hold the Senate. The results came out in line with expectations. 

The dollar was slightly weaker and equities higher following the election. According to BNZ, stocks have historically performed well after US mid-terms. 

On Thursday we had the November FOMC meeting. The meeting looks to have sealed the deal for a December interest rate hike. 

There were very little changes in the policy statement when compared to September. 

A noticeable change was the FED’s language about business investment. According to the FED it has “grown strongly”. 

The FED stated that they will keep to their current policy of “gradual increases” in the Fed Funds rate. 

Recent data is still pointing to a very strong US economy. The first look at GDP for Q3 came in at a solid 3.5%. 

The labour market is still solid at the moment. Wages is growing at the fastest pace since 2009. 

The Unemployment rate at 3.7% is the lowest it’s been since 1969. Not very far from an historical low of 3.4%. 

The positive FED tone saw the dollar appreciate across the board. 

The Week Ahead 

The most important data point for the USD will be October CPI data.  

Headline inflation has moderated since July’s high of 2.9%. Headline inflation is currently at 2.3% with Core CPI at 2.2%. 

Both still above the Feds 2% inflation target. 

Next week’s October inflation numbers on Wednesday 14 November will be important.  

The market is expecting CPI YY to climb to 2.5% from 2.3%. CPI MM is forecasted to rise to 0.3% from 0.2%.  

Core CPI YY is expected to remain flat at 2.2%. The Core CPI MM is expected slightly higher at 0.2% from 0.1%. 

With the recent drop in oil prices, there is a chance for a further miss in CPI numbers. Oil prices can act as a leading indicator for headline inflation. 

Notice above how US CPI YY numbers largely follow moves in Oil prices. 

The recent drop in Oil prices form October poses a risk to global inflation expectations. 

There is little chance that a continued drop will change the Feds mind about December. 

A further drop in inflation will give the FED some food for thought going into 2019. 

The market is pricing in 3 more hikes in 2019. 

According to ING, fading fiscal stimulus and slowing global growth is also important. Both will be headwinds for the US economy in 2019. 

On Thursday 15 November we will also have Retail Sales data for October. The market expects Retail Sales MM to increase to 0.5% from 0.1%. 

The current positive fundamentals should keep consumers optimistic according to Danske bank. That should provide support for private consumption to keep growth elevated. 

Westpac notes that October is set for a stronger number after the weak blip in September. They explain that the risks to Retail Sales are skewed to the upside this week. 

Trade Ideas 

The US economy is firing on all cylinders right now. The bigger picture Fundamentals are bullish for the USD. 

There is a good chance for another miss on headline CPI with oil prices being down 22% from October. Keep a close eye on the CPI release this week. 

A big enough deviation can provide a short term sell opportunity. With the emphasis on short term as the Dollar remains fundamentally bullish. 

The best opportunity this week would be a miss or beat on both CPI and Retail Sales. 

 Canadian Dollar 

What Happened Last Week 

The only risk event of note for the CAD was a speech by Governor Poloz. The Governor stuck to his overall hawkish view of the Canadian economy. 

There was nothing new in his speech which caused a muted reaction on the CAD. 

The CAD remained pressured due to the recent drop in Oil prices. The positive risk tone during the week did not offer much support for the CAD. 

Why is the Canadian Dollar influenced by Oil Prices? Canada is one of the world’s largest Oil producers. 

Over 15% of Canada’s exports come from Crude Oil. Any big deviations in oil prices can affect the CAD. 

The 22% drop in oil prices from the start of October has weighted on the CAD. 

The Week Ahead 

The economic calendar is very light this week. With the only event of note being Manufacturing Sales MM on Friday 16 November 2018. 

Markets are expecting Manufacturing Sales to bounce back to 0.4% from the -0.4% miss in August. 

Apart from that there are no other risk events of note in the week ahead. Scotiabank explains that we need to look out for possible USMCA comments this week. 

There is a risk of an implementation lag now that the Democrats won the House. 

Trade Ideas 

The economic calendar is very light this week. We expect oil prices and risk sentiment to be the CAD’s main drivers this week. 

If Oil prices continue to drop and risk sentiment deteriorates the CAD should be pressured. We can look for shorting opportunities if this happens.

If oil continues to fall and risk sentiment deteriorates the CAD should be pressured. If this happen, we can look for shorting opportunities. 

Risk sentiment can be very fickle so be careful. If you commit to any CAD trades keep a close eye on commodities and equities. 

Keep the news squawk on for any comments about the USMCA. Overly negative or positive comments can provide some trade opportunities. 

Any trades taken from USMCA comments needs to be in line with the oil price. Good news paired with a recovery in oil and bad news paired with a further fall in oil. 

 Great British Pound 

What Happened Last Week 

During last week traders took a more positive tone towards Brexit. According to BNZ, it seems like the UK and EU wants to wrap up a deal as soon as possible.  

The normal up and down rhetoric continued throughout last week. It seems like every positive comment is followed with a negative one and vice versa. 

On Monday we saw the Services PMI missing expectations. The PMI came in soft at 52.2 versus forecasts of 53.3. 

This was a concerning print after the disappointing Manufacturing PMI the week before. 

The UK is very dependent on its Services sector. Services account for about 80% of the UK’s total GDP. 

Despite the miss on Services the Pound rebounded on Monday due to positive Brexit tones. 

On Friday we also saw UK GDP data for Q3. 

GDP YY came out as expected at 1.5%. The quarterly numbers were also in line with consensus at 0.6%. 

The numbers failed to garner much attention from the markets. ING explains that the 0.6% gain was mainly attributed to seasonality. 

They note that the recent drop in PMI data suggest a Q4 GDP of 0.3%. The drop in PMI’s may suggest that Brexit uncertainty is beginning to concern businesses. 

Any subsequent PMI releases will be very important going forward. 

The decline of business investment is a concern according to Wells Fargo. Business has been reluctant to invest following the Brexit referendum in 2016. 

A further drop in business investment will be a headwind to UK production going forward. 

The Week Ahead 

The UK economic events kick off on Tuesday 13 November with the September Jobs report. 

The UK economy is expected to have added 34K jobs in September. Markets are forecasting the Unemployment rate to stay flat at 4.0%. 

Average earnings (ex-bonusses) are expected to stay flat at 3.1%. Wage growth reached its highest level in almost a decade in October. 

The rise in wages shows that skill shortages are putting pressure on firms to offer higher pay. 

On Wednesday 14 November we will have CPI data for October. Markets are expecting CPI to rise slightly in October. 

CPI YY are forecasted to rise to 2.5% from 2.4%. Consensus expects Core CPI YY to climb to 2.0% from 1.9%. 

Wells Fargo notes that the BOE does not expect CPI to fall much further. The BOE sees CPI holding close to their 2% inflation target. 

According to Scotiabank, consensus is divided for Wednesday’s Core CPI print. Analysis are forecasting both higher and lower numbers. 

With expectations this mixed any big deviation can be market moving. 

On Thursday 15 November we have Retail Sales data for October. Markets expect Retail Sales MM to bounce back after a disappointing -0.8% prior print. 

Consensus are for Retail Sales MM to rise to 0.2% from -0.8%. Retails Sales YY are expected to drop to 2.8% from 3.0%. 

Trade Ideas 

Brexit will continue to be the main driver of the Pound. 

Any big deviations in the data needs to be traded in line with Brexit sentiment. 

The sentiment about Brexit is very volatile. Make sure to manage your risk and be careful with Pound pairs. 

The main issue keeping back a Brexit deal remains the Irish border. Any positive or negative news on this will be market moving. 

Keep the news squawk tuned in to take advantage of any potential Brexit news. 

 Australian Dollar 

What Happened Last Week 

The Aussie Dollar had a significant rally this past week. The overall improved risk tone kept the AUD buoyed. 

The softer tone between US and China regarding trade was one contributor to this. 

On Tuesday last week we also had the recent RBA meeting. The RBA kept interest rates unchanged as was widely expected. 

Growth and inflation forecasts were revised higher by the RBA. This provided additional support for the AUD. 

Westpac notes that consumer spending and residential investment has slowed significantly. They view this as headwinds to the RBA’s upward revisions. 

Continued declines in consumer spending and housing will be important going forward. 

A surprise jump in Chinese Imports YY from 14.3% to 21.4% gave further support to the AUD. Australia sends 30% of their exports to China. 

Chinese economic data can have a big impact on the AUD. 

The Week Ahead 

The recent rally in the AUD has been boosted by a recovery in Equity prices. Any big moves in Equities will be very important for the AUD. 

On Tuesday 13 November the week kicks off with NAB Business Confidence. Wednesday 14 November will have the Westpac Consumer Confidence. 

Consumer Confidence will be important given the recent slowdown in consumer spending. Westpac explains that the 1.0% rise in October followed a 5.2% decline over the previous two months. 

Mortgage rate increases, rising petrol prices and declining house prices has troubled consumers. 

On Wednesday we will also have the Wage Price Index for Q3. Lagging wage inflation has kept a lid on Australian CPI for some time. 

From the chart we can see wage growth has been at record lows for some time. 

Markets are expecting Wage Prices QQ to stay flat at 0.6%. Wage inflation YY is forecasted to climb to 2.3% from 2.1%. 

On Thursday 15 November we have the October labour report. The previous Unemployment rate smashed expectations by dropping to 5.0% from 5.3%. 

The RBA considers 5% as Australia’s natural rate of unemployment. The main reason for the sudden drop was due to a lower participation rate. 

Markets are expecting the Unemployment rate to tick up to 5.1%. Headline employment is expected to come in at 20.0K. 

Trade Ideas 

Keep a close eye on things like equities and commodities this week. Any meaningful rally or correction will most likely impact the AUD. 

Make sure to evaluate the economic data in line with the current risk sentiment in the market. 

In terms of the employment data keep the full-time employment in mind. Don’t get blindsided by the headline number alone. 

Full time jobs are more important. Analyze headline numbers in the scope of the full-time jobs as well. 

 New Zealand Dollar 

What Happened Last Week 

Due to the better risk tone in the market the NZD had a good week. The NZD outperformed its antipodean neighbor hitting a three-month high. 

The highlight of the week was a massive unexpected beat on NZ Unemployment rate. The Unemployment rate fell to 3.9% versus a forecast of 4.5%. 

The big beat set NZ Unemployment at its lowest since the Global Financial Crisis. 

Westpac noted that the size of the beat suggests a possible sampling error. They stated that a rebound with the next quarterly reading is highly likely. 

Last week also had the latest RBNZ policy meeting. Interest rates were kept on hold as was widely expected. 

The RBNZ had a dovish stance with their previous policy meeting. They pushed back their first interest rate hike into 2020. 

Economic data following the prior meeting has been very positive. The number for GDP Q2, CPI for Q3 and Employment all beat market expectations. 

Markets were keen to see whether the recent data beats would change the RBNZ’s dovish stance. The RBNZ didn’t disappoint and removed the phrase saying the next OCR move could be “up or down”. 

The market’s reaction to the RBNZ policy was muted following the beat on Unemployment data. 

The Week Ahead 

There is a very light calendar for the NZD this week. 

The only event of note is the Manufacturing PMI on Thursday 15 November. 

Better than expected data should provide some support for the NZD this week. With a light calendar we expect risk sentiment to be a big driver for the NZD this week. 

In our past three articles we noted that there is record short positioning on the NZD. 

Short positions were trimmed last week after the positive data. The net short positioning is still at record levels. 

The reasons to be short on the NZD have diminished with the recent beats. 

Trade Ideas 

Keep a close eye on the risk sentiment this week. If Friday’s correction in Equities spill over this week it can weaken the NZD. 

If we see positive risk tones, we would expect the NZD to stay supported in the medium term.  

 Euro

What Happened Last Week 

It was a bumpy road for the Euro last week. 

The first trouble for the Euro came after Wednesday’s FOMC meeting. 

The Euro has a 57.6% weight in the Dollar Index. This means any significant moves in the DXY normally affects the Euro. 

The Euro sold off across the board following Wednesday’s positive FOMC statement. 

On Thursday last week the European Commission released their latest EU forecasts. 

The EC revised Italy’s budget-deficit upwards and lowered project growth forecasts. This did not sit well with the Italian government. 

Italy’s Tria hit back saying the EC’s forecasts were based on “inadequate and partial analysis”. Italian PM Conte also lashed out saying Italy does not have to make concessions to Brussels. 

This kept the Euro pressured throughout most of the week. 

The Week Ahead 

There are a couple of important events for the Euro this week. 

On Tuesday 13 November we will have the latest German Zew economic figures. The EU has seen a steady slowdown in growth during 2018. 

The ECB remains positive about growth. ECB’s Draghi stated the EU is “experiencing a weaker momentum but not a downturn”. 

As the EU’s largest economy, Germany growth is very important. 

 

Danske Bank explains that German Zew figures has dropped substantially in 2018.

The market expects Zew Economic Sentiment to drop to -25.0 from -24.7. Consensus expects Zew Current Conditions to fall to 65.0 from 70.1. 

On Wednesday 14 November we will also have GDP numbers for Germany and the EU. Germany’s numbers will be more important as they are the first look at Q3 growth. 

Markets are expecting German GDP Flash QQ to contract to -0.1% from 0.5%. Forecasts for German GDP YY Flash are to fall to 1.2% from 2.3%. 

Notice from the above chart that GDP for the EU and Germany peaked in December 2017. Lower numbers will put further pressure on the Euro. 

On Friday we will also see Final CPI numbers for the EU. According to Danske Bank, as final number no fireworks are expected from the release. 

Tuesday 13 November is also the deadline for Italy to submit their revised budget to the EU. ING explains there are “no signs that the Italian government is yet ready to compromise”. 

If the standoff continues it should put further pressure on the Euro. 

Trade Ideas 

Keep a close eye on the German Zew and GDP numbers this week. The Euro is already pressured due to growth concerns. 

The best trade scenario would be further misses on data releases this week. 

Also keep the news squawk tuned in for further Italian budget developments. Any negative comments could be market moving. 

It is not sure how much of the Italian budget concerns have been priced in already. Key focus this week should be on the growth numbers. 

 Japanese Yen 

What Happened Last Week 

Moves in the JPY was largely dictated by risk sentiment last week. 

The JPY depreciated during the risk-on sentiment at the start of the week. The risk-off tone on Friday was safe-haven flows supporting the JPY. 

The Week Ahead 

The main event for the JPY this week will be GDP numbers for Q3. 

Markets are expecting Q3 GDP to contract to -0.3% from 0.7%. GDP YY is expected to drop to -1.0% from 3.0%. 

Wells Fargo notes that Q2 growth rebounded in Q2 after a weak Q1. This was mainly due to a pickup in business investment. 

According to Danske Bank, the slowdown in Q3 is “probably due to typhoons and an earthquake”. 

Global equities are another key asset class to keep track of next week. Any rallies or corrections should have an impact on the JPY. 

Trade Ideas 

Watch out for Q3 GDP numbers this week. A big deviation in growth might provide trading opportunities. 

Make sure to analyze the risk sentiment before considering JPY trades. If the data and risk sentiment is mixed be careful. 

Global equities were in the red across the board on Friday. If the correction continues, we expect to see the JPY supported as a result. 

 Swiss Franc 

What Happened Last Week 

The Swiss Franc had another choppy week last week. As a safe-haven currency the CHF normally moves with risk sentiment. 

The CHF has not really behaved as a traditional safe-haven over the past couple of weeks. 

There were also no major risk events last week for the CHF. 

The Week Ahead 

The Swiss Franc has another light economic calendar this week. 

ING notes that the Italian budget concerns should be supportive of the CHF. 

Also keep a close eye on Equities and Commodities this week. If the negative risk tone from Friday continues it should support the Franc. 

Trade Ideas 

The movements in the CHF has been erratic over the past few weeks. 

It seems like the traditional safe-haven correlation has not been a big driver for the CHF. 

The CHF has had whipsaw moves the past couple of weeks.  

With a light economic calendar, we expect risk sentiment to be the main driver for the Franc. 

We would be careful of the CHF at the moment.  

Wrap Up 

Monday should be quiet with a lack of tier one data and USD and CAD bank holidays. 

There are a few Economic highlights this week. UK and US CPI, UK wages, Aussie jobs and German growth numbers. 

In politics watch out for Brexit and Italian budget concerns. 

Also keep a close eye on global equities and commodities after Friday’s risk off tone. 

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