Weekly Market Outlook – FX traders are in for a volatile week amidst a lot of data coming out of major economies. Among the reports will be the CPI data for Japan, the UK, and Australia, the labor market report from the UK and Australia, retail sales from the US, UK, and Canada, and the early Fed surveys from New York and Philly for January will be released. It’s the Bank of Japan meeting that will make this week memorable.
What to watch on the Economic Calendar this week:
Monday, Jan 16:
- NZD: NZIER Business Confidence (Q4)
- CNY: GDP Growth Rate (Q4)
- CNY: Industrial Production (DEC)
- CNY: Retail Sales (DEC)
- CNY: Unemployment Rate (DEC)
Tuesday, Jan 17:
- EUR: Germany CPI Final (DEC)
- GBP: Claimant Count Change (DEC)
- GBP: Average Earnings (NOV)
- EUR: Germany ZEW Economic Sentiment Index (JAN)
- CAD: Housing Starts (DEC)
- CAD: CPI (DEC)
- USD: NY Empire State Manufacturing Index (JAN)
- JPY: BoJ Quarterly Outlook
- JPY: BOJ Monetary Policy Statement
Wednesday, Jan 18:
- GBP: Inflation Data
- EUR: Inflation Rate Final (DEC)
- CAD: PPI (DEC)
- USD: PPI (DEC)
- USD: Retail Sales (DEC)
- USD: Industrial Production (DEC)
- USD: Manufacturing Production (DEC)
- USD: NAHB Housing Market Index (JAN)
- NZD: Food Inflation (DEC)
- JPY: Trade Balance (DEC)
- AUD: Employment Change (DEC)
Thursday, Jan 19:
- USD: Philadelphia Fed Manufacturing Index (JAN)
- USD: Unemployment Claims
- USD: Building Permits Prel (DEC)
- USD: Housing Starts (DEC)
- USD: Crude Inventories
- NZD: Business NZ PMI (DEC)
- JPY: National Core CPI (DEC)
Friday, Jan 20:
- EUR: Germany PPI (DEC)
- GBP: Retail Sales (DEC)
- CAD: Retail Sales (NOV)
- USD: Existing Home Sales (DEC)
Keep an eye on the Economic Calendar on a regular basis to stay abreast of the most important market events in the coming week.
JPY: BoJ faces a tough decision
Last month, the Bank of Japan shocked the financial markets by raising the long-term yield ceiling, which boosted the yen. A similar move is likely to be announced during the next policy decision on Wednesday. The market pricing reflects that there is a close call.
According to investors, there is a 45% probability that interest rates will increase by 10 basis points in the near future, which would mark a departure from negative rates. In a similar way, the spread between overnight index swaps and the 10-year yield is widening, indicating that the yield ceiling is going to be adjusted soon.
In December, inflation metrics for Tokyo reached their highest levels in four decades, arguing for another shock-and-awe move. BoJ believes that these measures carry some weight since they are considered forward-looking measures for the entire economy. However, media sources “in the know” suggest that many officials prefer to assess the impact of their previous decision before taking any further action.
Wage growth and household spending have slowed in recent months, which are worrying signs for inflationary pressures. The BoJ should be patient at this meeting and perhaps wait until March before taking the next step in its normalization campaign, considering everything from a risk management perspective.
It would give policymakers time to assess another couple of months’ worth of data before deciding how to proceed. It may be disappointing for the yen if the decision is made to remain on hold. Even so, the BoJ is likely to raise the yield ceiling again and ultimately raise rates, so the currency’s overall outlook remains bright.
While most central banks are about to end their own tightening cycles, the BoJ’s tightening policy could result in rate differentials compressing further in the yen’s favor this year. The persistent decline in energy prices, which is encouraging for an oil-importing economy like Japan, and the increased recession risks globally support this theory. Another driver of the yen could be speculation about who will replace Kuroda as BoJ governor in April.
USD: Retail sales are expected to Increase
Wednesday will bring us the latest batch of producer prices and retail sales in the United States. The inflationary pressures in America are finally cooling. However, this is not necessarily good news, since demand is also declining. This is usually a sign of softer economic growth – or even Recession – a few quarters later.
Consequently, retail sales, releasing this week, may receive some additional attention for an update on consumer demand. A huge surprise in this data would be required to change investors’ expectations of a 25-basis point Fed rate increase next month.
With hawkish expectations about the Fed waning, the dollar had a tough start to the year. The BoJ’s policy turn and the unusually warm weather in Europe played a role in calming nerves surrounding the energy crisis, boosting both the yen and the euro. However, it’s hard to predict a collapse of the dollar given the fact that most major economies are still in worse shape than the US.
It has been historically a fact that the dollar depreciates when the global economy is doing well and there are few risks, but this is not the case today. Thus, despite the sharp pullback, it seems premature to call for the dollar’s demise. The latest inflation numbers from Canada will be released on Tuesday, followed by retail sales on Friday.
GBP: Lots of releases in the UK
Monday will be the first day of the work week for the United Kingdom with the release of the latest jobs report. Inflation numbers are scheduled to be released on Wednesday, followed by retail sales on Friday.
A rate increase of 50 basis points from the Bank of England in February is currently expected, but there is still some uncertainty. Thus, this data could play an important role in shaping expectations and by extension, driving the pound.
It is difficult to be optimistic about the sterling as a whole. In spite of the fact that the Bank of England is raising rates, it is doing so reluctantly, paying greater attention to the recession risks. As a result of widespread worker strikes over insufficient wages, those have intensified lately.
There is also a strong correlation between sterling and stock markets beyond domestic factors. This seems like a vulnerability at the moment, since Wall Street valuations remain ‘expensive’ and out of sync with leading indicators of what will happen.
Australian and Chinese Indicators
So far this year, the China-sensitive Australian dollar is the best-performing major currency, but it’s unlikely this will last. The news that China will lift its export ban on some Australian goods propelled the currency higher recently, along with optimism about China’s reopening.
Unfortunately, this rally appears to be more hype than substance. As China has not implemented a full vaccination program, applying the Western model of economic reopening may be a mistake. Furthermore, China’s property problems haven’t been resolved, and any Western recession will inevitably hurt both China and Australia.
On Tuesday, China’s GDP numbers will be released, and estimates suggest that the economy contracted in the fourth quarter despite strict lockdown measures. On Thursday, the Australian employment report for December will be released.
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