Forex Major Currencies Outlook (Oct 22 – Oct 26)

This increase can positively influence the FED’s preferred inflation measure PCE.

Budget deficit has soared up in the first 11 months of the fiscal year by almost a third compared to the same period last year. Government spending has surged up to 7% while revenues rose 1%. US debt load is now at $21.5 trillion. A soaring budget deficit is something to pay attention to as it can have serious negative impacts on the USD in the long term.

Data regarding US JOLTS job openings came in at 7136K vs 6900K as expected which is a new record high for JOLTS and illustrates the strength of the job market.

The Atlanta Fed's latest estimate for the US 3Q GDP is set at 3.9%, that is a downgrade from the previous level of 4%.

The hawkish tone from Fed’s Powell during Wednesday’s FOMC Meeting Minutes strengthened the expectations for at least three rate hikes in 2019 along with the December 2018 rate hike.

This week we will have data regarding Durable Goods; they are part of Personal Consumption Expenditures and as such will have an impact on the GDP figure that will be announced on Friday.

Important events for USD:

Wednesday:

• New Home Sales m/m
• FED Beige Book

Thursday:

• Durable Goods Orders m/m
• Core Durable Goods Orders m/m
• Goods Trade Balance
• Initial Jobless Claims
• Pending Home Sales m/m
• Pending Home Sales y/y

Friday:

• GDP q/q
• Core PCE Price Index q/q

EUR

President of the ECB Mario Draghi stated in a statement at the IMFC meeting that the Euro Area economy continues the expand in a broad-based manner - across sectors and countries – and according to the latest economic indicators, this growth will continue. The unemployment rate has dropped to the lowest levels since 2008. Underlying inflation is expected to pick up towards the end of the year which would lead to a gradual increase over the medium term to projected levels of close to (but below) 2%. Significant monetary policy stimulus is still needed.

ZEW economic sentiment came lower both for Germany and for the EU. Investors’ outlook was damaged by intensifying trade disputes between US and China as well as the dangers of a “hard Brexit”.

Final CPI in the Eurozone came in at +2.1% y/y, final core CPI at +0.9% y/y and CPI m/m at 0.5% as expected.

This week on Friday we expect a review of Italy’s credit rating by S&P Global Ratings and by Moody’s near the end of the month. Currently the Italian rating is just two levels above junk status and a downgrade will result in further pressure on Italian assets and the euro. This will be a key risk factor to look out for in the week ahead.

In Italy’s budget plan proposal submitted on October 15th, the goal is to cut debt-to-GDP ratio by 4.5% in 3 years. Italy’s Finance Minister Tria stated that growth estimates in budget are conservative. The European Commission has a days to make their concerns known to Italy (October 22nd). European Commission has up to a week to reject Italy's submission (October 29th). If the budget proposal is rejected, Italy will have up to 3 weeks to come up with a new budget proposal.

This week we will see data regarding business conditions in the manufacturing sector for the EU, France and Germany as well as the ECB Interest Rate Decision and press conference afterward.

Important events for EUR:

Wednesday:

• Markit Manufacturing PMI (EU, France and Germany)
• Thursday: ECB Deposit Facility Rate Decision
• ECB Interest Rate Decision
• ECB Monetary Policy Press Conference

GBP

Average earnings have beaten expectations coming in at 3.1% excluding bonuses - the highest reading since 2009 - and 2.7% including bonuses which will give pound a nice underpin and certainly satisfy BOE. Positive data may give reason to BOE for a rate hike sooner than expected. Currently, the market has priced in a rate hike not before May 2019. A recent dovish shift suggests that a rate hike is expected to come later, with August 2019 as most likely.

Inflation data from UK came in softer than expected with CPI coming in at +2.4% vs +2.6% y/y expected and CPI core coming in at +1.9% vs +2.0% y/y expected. Slowdown in inflation should not have a big impact on GBP. A second rate hike for the year, which already had a little probability of happening, is now taken off the table. Additionally, inflation softening combined with high wage growth will relieve pressure on household incomes.

This week we will have data regarding UK Finance Mortgage Approvals which is a leading indicator of the UK’s Housing Market.

Important events for GBP:

Wednesday:

• UK Finance Mortgage Approvals

AUD

RBA Financial Stability Review stated that the RBA is satisfied with the domestic situation and sees risks mainly offshore stating that trade tensions and slowdown in China could affect the global economy and start a global economic downturn. The level of household debt is high but does not appear to be a large risk to the financial system. Debt levels could be a risk if they cause households to cut back on consumption.

RBA October minutes were published last week and it was stated that RBA should continue holding rates at the current level as a source of stability. The next move in rates will most likely be a raise, however there is no necessity for such a move in the near-term. The modest fall in the AUD has helped domestic economic growth. Recent economic data points to a solid growth of GDP in Q3. Employment has risen strongly in the month of August, however average earnings are still weak which exerts downward pressure on inflation. Global growth is seen as solid for the next couple of years.

Previous week employment data came mixed. Employment change rose 5.6k which was a miss from 15.0 k expected and participation rate fell to 65.4% vs 65.7% as expected, but the unemployment rate fell to 5.0%. An unemployment rate of 5.0% is RBA’s estimate of full employment so we can expect some hawkishness in the RBA rhetoric in the future.

This week we will get more information regarding RBA view on employment figures and their impact on the Australian economy as a whole.

Important events for AUD:

Monday:

• RBA Deputy Governor Debelle Speech

Tuesday:

• RBA Deputy Governor Debelle Speech

NZD

Inflation data for NZD came higher than expected which immediately discarded any talks about rate cuts for NZD. Higher than expected numbers were caused by the rising oil prices while there was no growth in the “core” inflation. Later during the day RBNZ released information about one of its preferred inflation measures - the sectoral factor model - and data came unchanged, indicating no growth in the “core” inflation.

GDT auction came in at -0.3%. This marks the 10th month in a row of falling or flat dairy prices. Almost 95% of dairy products produced in New Zealand are exported. Therefore, a decrease in the GDT Price Index ultimately affects the exchange rate of the New Zealand dollar and can lead to its weakening.

This week we will have data regarding Trade Balance as well as Exports and Imports.

Important events for NZD:

Thursday:

• Trade Balance m/m
• Trade Balance y/y
• Exports
• Imports

CAD

Previous week was very good for the Canadian Dollar. Business Outlook Survey summarized: “Responses to the autumn Business Outlook Survey indicate that near term business prospects continue to be robust. Strong demand and elevated capacity pressures support firm's investment and employment intentions”. Strengthening of the Canadian dollar across the markets can lead to a hawkish Bank of Canada rate statement this week.

Canada’s CPI came in at +2.2% y/y vs + 2.7% expected with prior at +2.8%. This is a big miss in the data and markets immediately reacted with CAD weakness. However core inflation numbers came in at around 2.0% (Core common +1.9% vs 2.0% prior; Core median +2.0% vs +2.1% prior; Core trim +2.1% vs +2.2% prior ) which is in line with BOC’s target.

Retail sales came in at -0.1% m/m vs +0.3% expected with prior revised down to +0.2%. Retail sales ex Autos m/m came in at -0.4% vs +0.1% expected with prior revised down to +0.8%. These are weaker data in line with the softer CPI data.

Softer numbers ease pressure from BOC to deliver a hawkish message at Wednesday’s meeting although the rate hike is still priced in as a virtual certainty. There is less certainty however surrounding back-to-back hikes in December while odds of another hike in December are around 68%.

This week Bank of Canada will take the central stage with an interest rate decision, Monetary Policy Report and a press conference later on.

Important events for CAD:

Monday:

• Wholesale Trade m/m

Wednesday:

• BoC Interest Rate Decision
• BoC Rate Statement
• BoC Monetary Policy Report
• BoC Monetary Policy Report Press Conference
• EIA Crude Oil Stocks Change

JPY

During the IMF summit BOJ Governor Kuroda stated his satisfaction with FED rate hikes characterizing them as good for global economy. BOJ is taking longer to achieve its projected inflation target of 2%. Additionally Kuroda stated to a branch manager meeting that Japan's economy is expected to continue expanding moderately and that BOJ will continue with monetary base expansion until inflation stably exceeds the 2% mark. BOJ will keep short and long-term interest rates at the current very low levels for an extended period.

National CPI came at 1.2% y/y vs 1.3% expected, prior 1.3%. National CPI excluding Food, Energy came in at 0.4% y/y as expected; the prior was 0.4%. These data points are well below the BOJ inflation target of 2%.

This week we will have data regarding Nikkei Manufacturing PMI, Corporate Services Price and inflation.

Important events for JPY:

Wednesday:

• Nikkei Manufacturing PMI

Thursday:

• Bank of Japan (BoJ) Corporate Services Price Index y/y

Friday:

• Tokyo CPI y/y
• Tokyo CPI excl. Food and Energy y/y
• Tokyo Core CPI y/y

CHF

Swiss Governor Jordan reiterated SNB’s stances in his interview on SRF radio. He mentioned the fragile situation in the markets as well as the pledge of SNB to intervene if needed. He also stated that there are no signs of overheating in the economy, therefore it is appropriate to leave the policies unchanged. Additionally, he stated that FED is making the correct moves.

Trade balance for Switzerland came in at CHF 2.43 billion vs CHF 2.13 billion prior (revised to 2.08 billion). Both monthly export (-0.8% m/m vs +0.6%; revised to -0.3%) and monthly import (-0.4% m/m vs -2.8%; revised to -2.5%) figures are down which is not a good sign, but it is not alarming at this point.

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_{Please note that this analysis should not be used as investing advice as it is only an overview of the economic events influencing the markets.
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