In this article we will highlight the key trade opportunities on the economic calendar. We will also be looking at three scenarios that could provide opportunities to profit.
We will discuss this week’s main risk events and provide you with guidance on how to trade them. This will include three scenarios that will provide great trading opportunities.
The main event last week was the FOMC’s monetary policy decision which saw rates remain at 1.50-1.75%.
According to Bloomberg, the Fed conveyed a ‘relaxed attitude toward inflation’. Suggesting there would be ‘no shift to a faster pace of monetary policy tightening’.
This week, the market’s main focus will likely shift from the FOMC to the BoE. The RBNZ will also be in focus as they announce their latest decision on May 9th.
The key highlights for FX traders this week are as follows:
- The BoE rate decision could give us three clear scenarios to make money. The most likely scenario is that GBP remains under pressure until the end of the week.
- New Zealand’s inflation expectations could set the tone heading into the RBNZ. A significant increase would be NZD positive and a decrease NZD negative.
- USD could strengthen heading into US CPI given USD’s current positive sentiment bias. This should be further supported by CPI expected to improve from last month.
Tuesday, May 8th
AUD – Retail Sales
The first opportunity of the week will be from Australia with Retail Sales for March and Q1.
Although not a major event, a significant deviation could provide a trading opportunity. Especially considering AUD has remained well supported over recent sessions.
If the data beats expectations, we would expect AUD sentiment to remain positive. On the other hand, a miss could see some profit taking, causing AUD to weaken.
As this is not a significant event, we would only recommend entering on a strong deviation. Ideally with both Retail Sales M/M and Q/Q deviating in the same direction.
If the deviation is marginal or as expected, we would not expect a sustainable reaction. This would likely mean there would be no trading opportunity.
NZD – Inflation Expectations
According to Statistics New Zealand, inflation slowed to 1.1% for Q1. This puts inflation at the lower bound of the RBNZ’s 1-3% inflation target.
Bloomberg suggests that most economists expect inflation to pick-up later in 2018. However, inflation expectations will play a key role as to whether that remains the case.
Like many aspects of economics, inflation can be a self-fulling prophecy. This means the expectation of higher prices is what causes prices to rise.
For this reason, inflation expectations can influence the central bank’s outlook. To the point where a change in inflation expectations could influence monetary policy.
A significant increase in inflation expectations could see NZD supported into the RBNZ.
On the other hand, a decrease in inflation expectations could see NZD weaken into the RBNZ. Especially considering Q1’s weak inflation numbers.
If inflation expectations fall, you could consider selling NZD into the RBNZ. Alternatively, if they increase, you could consider buying NZD into the RBNZ.
If inflation expectations remain unchanged, there will likely be no significant market reaction.
Wednesday, May 9th
NZD – RBNZ Rate Decision
The main event on Wednesday will be the RBNZ’s latest monetary policy decision.
This report will consist of four key releases. The Official Cash Rate, Rate Statement, Monetary Policy Statement, and Press Conference.
The RBNZ announce the Cash Rate, Rate Statement, and Monetary Policy Statement together. While the Press Conference takes place one hour later.
According to Westpac, the RBNZ will keep monetary policy unchanged. However, if there is a change, it will be in the direction of earlier hikes.
Westpac goes on to stress that a change in the RBNZ’s wording does not necessarily mean a change in stance. This is because this meeting will be the first meeting under the RBNZ’s new governor, Adrian Orr.
A change in the RBNZ’s rhetoric may be a reflection of Orr’s own style of communication. This could result in market volatility as the market interprets Orr’s comments.
If the market interprets the RBNZ as hawkish, we would expect NZD strength. Especially if the market does bring forward its rate hike expectations.
If the market interprets the RBNZ as dovish, we would expect NZD to weaken. Especially if rate hike expectations get pushed back.
A hawkish or dovish stance will most likely be the result of the RBNZ’s outlook for inflation.
If hawkish, the RBNZ will likely present an optimistic outlook for inflation. Which may also include the RBNZ dismissing Q1’s weak inflation report.
If dovish, the RBNZ will likely show a degree of concern over the inflation outlook. This may also include the RBNZ acknowledging or referencing Q1’s weak report.
Of course, the clearest signal would be a significant revision to inflation expectations.
A downward revision to inflation would be dovish, and an upward revision would be hawkish.
Thursday, May 10th
GBP – BoE Rate Decision
This week’s main event will be the Bank of England’s monetary policy decision.
The BoE has been in focus since several data points missed expectations in April. According to Reuters, this saw the market push back its expectations for a May hike.
As such, the BoE is now expected to remain on hold at this meeting. The bigger question, is, therefore, how much of an impact has the UK’s recent disappointing data had?
There are three scenarios which could provide great trading opportunities.
Although the BoE is no longer expected to announce a hike, a rate change is still a possibility. If the BoE does still decide to hike, GBP will strengthen across the board.
This is our first scenario and will make for a great trading opportunity.
If the BoE remains on hold as expected, the market will then turn to the vote split. This is the second scenario which could make for a great trading opportunity.
ING’s base case scenario is for the vote split to remain at 2-0-7. This would suggest McCafferty and Saunders remain the only members who vote for a hike.
If any more BoE members decide to join McCafferty and Saunders by voting for a hike, GBP could strengthen. However, the more compelling trade would be if McCafferty and Saunders revoke their dissent.
McCafferty and/or Saunders revoking their dissent would strike a very dovish tone. This would suggest that recent data has had a significant impact on the UK’s economic outlook.
Furthermore, this could see the market push it’s rate hike expectations into 2019. CNBC suggest current expectations are for the next BoE hike to come in August 2018.
Our final scenario comes from the BoE’s quarterly released inflation report.
The BoE‘s last inflation report stated that the BoE expects GDP to expand by 1.7% in 2018 and 1.8% in 2019. A significant downward revision to GDP would be another dovish signal.
The BoE expects inflation to continue declining. Falling inflation will ease the urgency to hike and present a more dovish tone.
However, significant reductions to GDP forecasts would signal concerns over recent disappointing data.
Therefore, a downward revision to both GDP and CPI would be very dovish. This would provide another excellent trading opportunity.
Of course, these scenarios are not the only possibilities. These are what we believe to be the highest conviction scenarios.
The BoE’s Rate Statement may also provide a trading opportunity. Especially if it’s portrayed to be clearly dovish or hawkish.
Once again, any references to recent UK data or future policy decisions will be key.
USD – CPI
US inflation is another event which has the potential to move markets. Furthermore, as a key focus for the FOMC, it has the potential to influence rate hike expectations.
As stated by Bloomberg, the Fed made sure to convey a relaxed tone over inflation at their May meeting. This could reduce the significance the market places on CPI.
Nevertheless, CPI remains the most significant data point for monetary policy expectations. Therefore, it should still provide great trading opportunities.
For a buying opportunity, we would look for an overall positive report. Ideally with all data points beating expectations.
For a selling opportunity, we would look for an overall negative report. Ideally with all data points missing expectations.
If the report prints mixed or as expected, there is unlikely to be a high conviction trade.
Friday, May 11th
CAD – Employment
The final event of the week will be Canada’s employment report.
This report will consist of two primary components. The Unemployment Rate and Employment Change.
The initial reaction will likely result from any deviation in the Employment Change. This is because Employment Change tends to deviate significantly from expectations.
Furthermore, Employment Change consists of two components. Full-Time Employment Change and Part-Time Employment Change.
This means the report can be misleading if full-time employment contradicts the headline. This can create volatility and CAD to whipsaw as the market digests the data.
For this reason, we want any deviation in Employment Change to be a result of Full-Time Employment Change.
Regarding the Unemployment Rate, any significant deviation from expectations will likely influence CAD. Although this too could create volatility if it contrasts with the Employment Change.
In conclusion, this week’s main event and market focus will be the BoE. Other trading opportunities will include the RBNZ, US CPI and Canadian employment.
The best opportunities for the BoE will be the three scenarios discussed above. Although you could trade into this event, all prior rate hike bets have likely been unwound.
This would suggest the higher conviction opportunity would be to trade out of this event.
If USD’s positive sentiment persists early in the week, trading into US CPI could be a good call. Likewise, trading into the RBNZ after inflation expectations could be effective.
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 another feature of risk event trading, please type your question in the comments below.