The Forex Week Ahead

The Forex Week Ahead: February 13th – 17th

USD Potentially key testimony from Fed Chair Yellen and a pair of important macro releases will concentrate US macro risk on Tuesday and Wednesday this week. Fed Chair Yellen then delivers her semi-annual monetary policy testimony to Congress before the Senate Banking Panel on Tuesday and the House Financial Services Committee on Wednesday. So far in her recent public appearances, Yellen has been reluctant to offer updated views on the economy and markets in terms of fiscal, regulatory and trade policy developments. That’s in large part because, well, there haven’t been many! Rather, there haven’t been many positive potential policy developments. So in this respect at least, one should probably expect much of the same from Yellen compared to her earlier communications. Risks will be focused upon tracking developments in the economy thus far and hinting at criteria for re-evaluating reinvestment policy. Whether she repeats that the Fed will evaluate incoming data “over coming months” or not will be carefully watched to reaffirm that the Fed is on hold. Perhaps of equal if not greater importance will be the tone of the questioning and commentary. Will Republicans still chide the Fed for overly lax monetary policy? Yellen can obviously hold her own either way, but hopefully the Republican-controlled Congress may recall that a Federal Reserve that coaxes along economic expansion through gradual policy adjustments offers the new administration a better chance at prolonging the recovery than the alternative. A hawkish Fed, inflated dollar and rattled bond market would not be kind to Republicans into the next mid-terms.

Retail sales (Wednesday) in January could face the risk of a dip given what we know happened to vehicle sales and gasoline prices over the month. Gas prices were up by 4% m/m in January over December and they carry about an 8% weight. This translates into roughly a 0.3% addition to headline retail sales assuming that the volume of gasoline was little changed. Auto sales were down -4.4% m/m in January over December with about a 21% weight so that translates into roughly a -0.9% drag to headline retail sales. Also on Wednesday, CPI is expected to be a non-event—which probably means watch out. Consensus expects headline CPI to remain at 2.1% y/y and core CPI ex-food-and-energy to also remain unchanged at 2.2% y/y. Whether the latest prints tick up or down, the Fed prefers the price deflators on total consumer expenditures because the PCE price deflator dynamically adjusts for changes in what consumers spend money on and where, whereas CPI uses periodic updates to fixed weights and thus CPI more slowly adjusts to substitution and income effects in response to relative price changes. Other macro reports will concentrate upon the industrial sector and will include regional manufacturing reports (Empire Wednesday, Philly Fed Thursday), industrial production (Wednesday) and producer prices (Tuesday). Housing starts (Thursday) and real wages (Wednesday) round out the hits.

EUR The second estimate of Eurozone GDP growth for Q4 will be determined by the first estimates for Germany and Italy. The initial Eurozone growth estimate was 0.5% QoQ at a seasonally adjusted and annualized rate. France dragged down the headline a little with 0.4% growth, while smaller economies contributed to upside influences as captured within the EU28 that grew by 0.6%. Germany’s economy is thought to have grown by just under ½% in Q4 and Italy’s is thought to have grown by about half that rate. ZEW investor expectations survey on Wednesday that combines with PMIs, IFO and broader Eurozone confidence gauges as sentiment measures; Eurozone trade figures toward the end of the week; industrial production from the Eurozone by mid-week.

GBP Inflation figures will offer contrasting signals between expectations for a month-ago drop in prices versus further upward pressure upon year-ago inflation toward 2% YoY with core inflation possibly rising beyond the prior 1.6% YoY gauge. In month-ago terms, UK inflation was fairly tepid throughout most of 2016 with the sole exception of the December print that itself is expected to reverse lower in next week’s January reading. Should this subdued month-ago pattern persist, then the year-ago rates may be plateauing fairly soon as base effects shake out. That, in turn, could serve as further geographical evidence to de-motivate the reflation trade as seen across other world regions Whether that transpires or not as a cap on the large run-up in UK inflation break-evens significantly depends upon the outlook for pound sterling and hence hard Brexit concerns. Retail sales will end the week amidst expectations for stabilization if not a bounce back from the 2% MoM decline in December excluding fuel.

JPY Q4 GDP from Japan, Japan’s economy likely remains in the doldrums with quarterly growth around a similar pace to the prior quarter’s 0.3% QoQ (1.3% annualized). But the report will also update Japan’s economy-wide GDP price deflator which has been dropping again.

AUD Australian jobs report! Next Wednesday offers up the January reading and will be watched for signs of whether the late 2016 momentum is carrying over into the new year. Australia created 67,000 jobs over the final three months of 2016. That was solid, but inadequate relative to the speed of entry into the workforce by people looking for work and so the unemployment rate ticked higher to 5.8%. Australia’s labour force participation rate is only about 1 percentage point behind the all-time peak in late 2010 and so the country does not face the same debate about alternative measures of labour market slack as countries like the US.

CAD Manufacturing sales (Wednesday) probably slowed in line with cooler export growth in December. Since the numbers will reflect what happened to orders over prior months, it will be a dated report before trade policy uncertainty crept into the picture. Existing home sales during January will be updated the same day. They never impact markets, and completed sales in January are usually soft given the timing would work out to moving in by late winter or early Spring before schools are out for the summer. That’s controlled through seasonal adjustments to the national totals, but not the local/provincial results beforehand.