Week in Preview: Will the Bank of Japan Disappoint?

Plenty of economic data will come into focus this week and help to set the medium term tone for major currencies like the Euro, Yen and Australian dollar. The notion is particularly true as the market will contend with two central bank decisions and the minutes release of another. Ultimately, it looks as if volatility is likely to remain a supported theme heading into the second half of January.

Bank of Japan Interest Rate Decision (January 21st)

Although usually not known for high profile decisions, the Bank of Japan will be targeted in early week action as traders either anticipate further aggressive stimulus by the central bank or the possibilities of a rate cut. With the central bank benchmark rate already at 0.10%, a rate cut would essentially return the world’s third largest economy to a zero rate policy, similar to measures implemented approximately 7 years ago. However, policymakers may, instead, take a wait and see approach, biding time till Governor Shirakawa steps down in April. The plausible scenario would leave yen bulls disappointed and could help the USDJPY seek out support via the 86.00 figure.

German ZEW Economic Sentiment (January 22nd, 5:00AM EST)

Investor optimism is anticipated to climb for the second month in a row as sentiment over the European economy improved considerably over the last month. For January, survey results are estimated to rise to 12.2, advancing from December’s 6.9. Optimism following assurances from both the ECB and Bundesbank that an economic recovery remains scheduled for the second half of 2013, is set to bolster the survey uptick. The sentiment would help to boost notions of a slightly less than 0.3% contraction for the year, and support the single currency further past 1.3300.

US Existing Home Sales (January 22nd, 10:00AM EST)

The notion of a US recovery has remained well supported by housing sector gains in the last couple of months – placing emphasis on this week’s existing home sales figures. Homes sales are anticipated to gain for the 3rd consecutive month, with estimates of a 5.11 million annualized gain. This would be the highest level since the beginning of 2011 and could lend to US dollar weakness, this time around, as it remains supportive of a potential end to Fed quantitative easing.

MPC Meeting Minutes (January 23rd, 4:30AM EST)

This month’s meeting minutes by the Monetary Policy Committee once again comes into light as traders will no doubt scrutinize the meeting’s minutes for any clues of further monetary easing. In particular, market analysts will be most focused on any mention of the Funding for Lending scheme and how it is currently underpinning any type of bullish sentiment in the UK economy. Expect mentions of the current asset purchase facility to be a non-factor as policymakers remain steadfast in their concern over brewing inflationary pressures.

Bank of Canada Interest Rate Decision (January 23rd, 10:00AM EST)

The second of the two central bank meetings for the week, the Bank of Canada rate decision isn’t expected to garner that much attention. After all, the policymaking body hasn’t moved on interest rates in over 2 ½ years. However, traders will be eyeing any further hawkish comments from Bank of Canada Governor Mark Carney. The policymaker noted consideration of “some modest withdrawal” of monetary easing in the last meeting, forecasting growth in the Canadian economy to top 2.5% this year. However, with last year’s rather lackluster 1.5% pace of growth, the BOC may have decided to change it’s tone. Expect the parity level to be broken to the upside in USDCAD if this happens

HSBC Flash Manufacturing PMI (January 23rd, 8:45PM EST)

The flash Chinese manufacturing report by HSBC remains a key release for the week, with all of the attention surrounding recent Chinese economic data. According to government data, the country’s manufacturing, trade balance and growth figures have all been reflective of positive growth. But, the releases have sparked a lot of skepticism by the market, allowing the HSBC report to serve as confirmation. Expect the Australian dollar to receive a much needed boost above 1.0600 if the report gains for the third month in a row.