Analysis

5 Biggest Risks for FX this Week

Monday was a slow start to a busy week for the currency market. The US bond market was closed for Veteran's Day but the stock market was open allowing stocks to consolidate gains. After last week's big moves, the mood on trade turned sour again after President Trump said he hasn't made a decision on tariff rollbacks. Over the weekend, his contradictory comments continued as the President said talks were moving "very nicely" but the US would only make a deal with China if it were the right deal for the the US. Director of Trade Peter Navarro also said there will be no tariff rollback as part of the phase one trade deal. In a nutshell, last week's positive trade headlines created false optimism in the markets. At this stage, few investors should be surprised by this back and forth as trade developments remain one of the greatest risk for FX trade this week. 

Including trade, here are the 5 biggest risks for currencies:

  1. Fed Chairman Powell's semi-annual testimony to Congress on the economy & monetary policy (Wed)
  2. US President Trump speaks to economic club of NY (Tues) & Ongoing focus on trade
  3. Reserve Bank of New Zealand rate decision (Wed local time)
  4. Australia's Employment Report (Thursday local time)
  5. US Retail Sales (Friday) 

On top of all this, the market is on high alert for a decision on EU auto tariffs. The Europeans don't expect them to be imposed but when it comes to decisions by Trump, you never know.

Federal Reserve Chairman Powell's semi-annual testimony to Congress is one of the most important events this week but Powell won't be the only central banker speaking. We have scheduled events for nearly every US policymaker and many of them will be discussing monetary policy or the economy. Its no secret that after three rounds of easing this year, the Federal Reserve won't be delivering a follow up move in December. Powell also made it clear last month that the latest move was insurance, a message that we expect to be echoed by US policymakers throughout this week. We'll also hear from Bundesbank Governor Weidmann, RBNZ Governor Orr, BoC Governor Poloz, RBA Assistant Governor Bullock and Deputy Governor Debelle.

The best performing currencies today were sterling and the New Zealand dollars.   Despite weaker than expected UK GDP, trade and industrial production numbers, sterling popped after Nigel Farage said his Brexit party will not contest the seats won by the Tories at the last election. This is great news for Boris Johnson who now has a much greater chance of winning the December election. A victory is not guaranteed and there could still be a hung parliament but this announcement could completely overshadow softer data this week. With that said, the latest numbers reflect the negative impact of Brexit. GDP growth rose less than expected in the third quarter and slowed year over year. Industrial production continued to fall and the trade deficit widened more than expected. UK labor market numbers are scheduled for release tomorrow and the risk is to the downside after PMIs reported weaker job growth in manufacturing and services.

Economists are looking for the Reserve Bank of New Zealand to lower interest rates on Wednesday but the market is pricing in only 60% chance of easing. Either way, we believe that the New Zealand dollar should be trading lower ahead of the monetary policy announcement but currency traded sharply higher today after the shadow RBNZ recommended that the central bank keep rates steady. We believe that even if the RBNZ leaves rates unchanged, ongoing uncertainty in the region should keep them dovish and the risk for NZD is to the downside.

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