Written by Terri Belkas, Currency Strategist
The US dollar, euro, British pound, Australian dollar, and Canadian dollar all face very high event risk next week due to employment reports and a total of four rate decisions.
The US dollar, euro, British pound, Australian dollar, and Canadian dollar all face very high event risk next week due to employment reports and a total of four rate decision. Among the central banks that are meeting, including the RBA, BOE, ECB, and BOC, none are expected to reduce rates, but there is still the question of their policy bias going forward, especially when it comes to credit and quantitative easing.
• Reserve Bank of Australia (RBA) Rate Decision – June 2
The Reserve Bank of Australia is anticipated to leave their cash rate target unchanged at 00:30 ET on Tuesday for the second straight month at 3.00 percent, and the Australian dollar may only respond to a surprise rate cut or a biased monetary policy statement. After the central bank’s last meeting, RBA Governor Glenn Stevens said that future rate cuts would be based on “how economic and financial conditions unfold, and how they impinge on prospects for a sustainable recovery in economic activity.” As a result, it will be important to look to Bollard’s statement, as signs that the economy or financial markets are not holding up strongly enough for the RBA’s liking may suggest that the central bank will consider cutting the cash rate target again, and this news could weigh on the Australian dollar. On the other hand, indications of a broadly neutral bias and comments suggesting that 3.00 percent is essentially the floor for the cash rate target could support the currency.
• Bank of England (BOE) Rate Decision – June 4
The Bank of England is expected to leave rates unchanged for the third straight month on June 4 at 7:00 ET at an all-time low of 0.50 percent. Based on the BOE’s last policy statement and the minutes from the meeting, we know that the central bank expanded their quantitative easing (QE) program by 50 billion pounds to 125 billion pounds (which happened to be by a unanimous vote), that the drop in Q1 GDP of -1.9 percent was worse than expected, and that CPI will likely will be below the BOE’s 2 percent inflation target in the medium term. The minutes also revealed that some members thought that “a case could be made for a larger stimulus,” but the high uncertainty of QE led them to believe that there was “no pressing need for the larger extension” at that point. Ultimately, how the British pound responds will likely depend on the BOE’s QE stance. Signs that the BOE may increase their gilt purchases could weigh heavily on the British pound, especially against the euro, while the opposite (steady rates, no QE expansion) could provide a boost to the UK’s currency, though the markets are just as likely to show no reaction in this case.
• European Central Bank (ECB) Rate Decision – June 4
According to a Bloomberg News poll of economists, the ECB will leave rates unchanged at 1.00 percent on Thursday morning. However, where the currency ends the day may have more to do with what ECB President Jean-Claude Trichet says during his post-meeting press conference at 08:30 ET. Indeed, in May the ECB announced that they would buy 60 billion euros worth of covered bonds issued in the Euro-zone, but that details wouldn’t be released until after this upcoming meeting. As a result, much attention will be paid to which bonds will be bought and how the ECB plans on going about buying them, as direct buying from issuers would effectively supply them with direct funding, whereas the purchase of existing covered bonds would support prices and drive down yields.
• Bank of Canada (BOC) Rate Decision – June 4
The Canadian dollar could see a pickup in volatility on Tuesday at 9:00 ET as the Bank of Canada is expected to leave rates unchanged at 0.25 percent, following their surprise 25 basis point reduction on April 21. During that April meeting, the BOC made it clear that they intended to leave rates at that level though June 2010, but a bombshell came from the BOC’s Monetary Policy Report a few days later, as they left the door open to quantitative easing (QE) and credit easing if nominal interest rates start to fall below zero. Indeed, the Bank stated that while they could cut rates to zero in theory, it would ultimately "eliminate the incentive for lenders and borrowers to transact in markets, especially in the repo market." As it stands, core CPI has held at a fairly robust 1.8 percent in April, suggesting that inflation remains high enough to suggest that QE will not be on the way anytime soon.
• Canadian, US Employment Reports (MAY) – June 5
At 7:00 ET, the Canadian net employment change is forecasted to have fallen by 40,000 during May following the surprise surge we saw in April. Furthermore, the unemployment rate is anticipated to have risen to match July 1998 high of 8.3 percent from 8.0 percent. Since the employment change tends to be a very volatile release, this should have the greater impact on the Canadian dollar, with a sharper than expected drop likely to weigh on the currency and an unexpected positive result likely to push it higher.
Though not always a reliable market-mover, the 8:30 ET release of US NFPs is sure to garner a lot of attention as the report is forecasted to show that the economy lost 521,000 jobs in May. This will mark the seventeenth straight month of job losses and the seventh month in which job losses amounted to more than 500,000. Adding to the mix, the unemployment rate is anticipated to surge to 9.2 percent – matching the September 1983 high - from 8.9 percent. Based on the fact that continuing jobless claims have done nothing but hit record highs, there is some potential for worse-than-expected results on Friday. However, as long as NFPs fall by fewer than 539,000 (the loss we saw in April), the markets may focus more on speculation that the worst is over for the US economy and that recovery may be on the way.
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