Summer end, ECB, NFP and more to come next week

The first week of September won’t bring just the usual mountain of Central Banks and economic data: will also be the return to trading desks after the long summer break. I’m not sure if the big question is if the ECB will launch QE or if volumes will return to “normal”, whatever normal means. 

Despite the week has been overloaded with data from Europe and the US, market has been thinner than ever, with majors confined to less than 100 pips for most of it. The most notable numbers had been no doubts US GDP revised up to 4.2% and European inflation slipping to 0.3% as expected, which again confirmed the imbalance between both major powers. That price action failed to reflect it, is a whole different story related the steady decrease in trading volume along the year, and the already mentioned summer break.

Another thing worth’s mention, is the increasing geopolitical risk coming from Russia and Ukraine. Tensions had it spike on Thursday, when Ukraine reported a military invasion, but the spike of risk aversion barely affected markets, with gold a few bucks higher before pulling back and shallow advances in both, JPY and CHF.

Anyway, hopefully we will get more action next week that will kick start with Australian Central Bank economic policy decision: no change to the cash rate is expected at the meeting, but the RBA's statement will be closely monitored, looking for Governor Steven’s stance:  he has become dovish lately, so another round of down talking Aussie won’t weight in the currency as much as if he all of a sudden comes with some hawkish comments on the economic developments. 

On Wednesday will be the turn of the Bank of Canada, also expected to remain on hold: BOC Governor Poloz has made clear during the latest Jackson Hole summit that his Central Bank won’t necessary follow the FED when this last starts raising rates. The comment came after Yellen signaled a possible rate hike sooner than first expected.

But it will be finally Thursday when the market will likely woke up by the hand of Mario Draghi,after a probably uneventful BOE: there’s indeed a high probability the ECB will finally establish quantitative easing or a large scale asset purchase, but is also possible for Super Mario to state the measures announced at latest June meeting like negative rates and the TLTROS, still need time to work out its effectiveness. 

Nevertheless, deflation risk is already priced in the EUR value, as shown on this Friday market reaction to the 0.3% reading. That means that at this point, market needs a certain action from the Central Bank: an announcement will likely be seen as a movement to fight deflation, resulting in a higher EUR at least in the short term. If on the other hand, Draghi keeps the wait and see stance, risk for the currency will remain to the downside rather on USD self strength, than any announcement the ECB may do.  For the most, market expects a moderate dovish Draghi, and little surprises for this month. Expectations this time, may be higher than the result, another factor than can trigger strong intraday market moves.

Finally on Friday, the US will release its monthlyNon Farm Payroll data: early August the release showed that nonfarm payrolls rose by 209,000 in July, missing economists' forecasts of a 230,000 gain, while unemployment rate ticked higher to 6.2%, still within FED’s mandate. Market was disappointed with the number, as expectations among investors were of a stronger than expected reading, but the movement was short lived: dollar closes the month higher against most rivals, exception made by commodity currencies, barely higher against the American currency. For this month, expectations are of 210K which means a higher number, particularly if it comes above that missed 230K, will likely boost the greenback particularly against EUR and JPY. Another disappointment however, will be dollar negative, with AUD and CAD better poised for a run higher.