Week Ahead in FX: USD Shrugs Off Dissapointing NFP

Lower Than Expected U.S. Employment numbers have eased pressure on the Fed but Will Force Other Central Banks into Action.

The highly awaited U.S. non farm payrolls report (NFP) dissapointed an already jittery market with 142,000 new jobs when more than 200,000 were expected. The USD fell after the release of the lower than expected October NFP report, adding the fact that the upward revision to the August number that was anticipated turned out to be a downward change. The U.S. Federal Reserve held rates in September which made the USD lose ground, but was quickly regained after policymakers still saw a rate hike before the end of the year. Employment, the strongest pillar of the U.S. recovery, has stumbled and has reduced the possibility the Fed will act in the two remaining monetary policy meetings left this year.

Some of the pressure the Fed was under to raise interest rates for the first time in a decade has eased for the American central bank. The pressure has shifted to other central banks that must step up their stimulus efforts to boost their economies. Next week the Reserve Bank of Australia and the Bank of Japan are expected to add to their easing policies to spark growth in local economies. The Bank of England will also host their rate setting policy meeting, but in a similar situation as that of the Fed, the British economy has cooled down along with the prospect of a higher interest rate in the U.K. in the near term. The Fed will release its minutes from the September FOMC later in the week, but after this Friday’s dissapointing NFP it will be hard to take them in context as the outlook that produced them has changed.

Forex market events to watch this week:

Monday, October 5
4:30am GBP Services PMI
10:00am USD ISM Non-Manufacturing PMI
5:00pm NZD NZIER Business Confidence
8:30pm AUD Trade Balance
11:30pm AUD Cash Rate
11:30pm AUD RBA Rate Statement
Tuesday, October 6
8:30am CAD Trade Balance
8:30am USD Trade Balance
1:00pm EUR ECB President Draghi Speaks
Tentative JPY Monetary Policy Statement
Wednesday, October 7
Tentative JPY BOJ Press Conference
4:30am GBP Manufacturing Production m/m

8:30am CAD Building Permits m/m
Thursday, October 8
7:00am GBP MPC Official Bank Rate Votes
7:00am GBP Official Bank Rate

8:30am USD Unemployment Claims
2:00pm USD FOMC Meeting Minutes
Friday, October 9
8:30am CAD Employment Change
8:30am CAD Unemployment Rate
Saturday, October 10
2:45pm CAD BOC Gov Poloz Speaks

RBA to Hold But NFP and Fed Could Bring a Rate Cut

The Reserve Bank of Australia (RBA) is expected to hold rates on its meeting this week. The central bank last cut rates in May to a record low 2.00 percent rate to boost the economy and offset the negative effects of the fall in commodity prices and China’s slowdown. It was the second rate cut of the year for the RBA, but after the Fed’s lack of action on the rate hike front the pressure is now on other central banks to step up their monetary policy in the other direction. The dissapointing U.S. employment numbers will probably have some weight in the RBA’s statement, but too soon to tell if they will force Governor Glenn Stevens to cut rates in this week’s meeting. The fact remains that the RBA will remain under pressure as the U.S. Fed’s interest rate hike timetable could be pushed well into 2016. This could result in a rate cut to the Australian benchmark rate before the end of the year and a lower AUD despite the risks to an overheating housing market.

Monday, October 5
4:30am GBP Services PMI
10:00am USD ISM Non-Manufacturing PMI
5:00pm NZD NZIER Business Confidence
8:30pm AUD Trade Balance
11:30pm AUD Cash Rate
11:30pm AUD RBA Rate Statement

ECB Rhetoric not Enough and Weak US Jobs Will Force New Round of Stimulus

European inflation turned negative again in September a few days ahead of the American jobs report. The market had begun to pile pressure on the European Central Bank (ECB) after the U.S. Federal Reserve had decided to hold the American benchmark interest rate. After a dissapointing NFP report the probability of a hike before the end of the year has been reduced and putting the onus on the ECB to add to its quantitative easing (QE) program launched earlier this year. On Tuesday, October 6, ECB President Mario Draghi will speak at a Art on Site event in Frankfurt, Germany.

Bank of Japan expected to Increase Stimulus in October

Prime Minister Shinzo Abe has borrowed a phrase from Mario Draghi’s repertoire and has pledged to do “whatever it takes” to get Japan back on track. After Abenomics has so far failed to live up to its lofty goal of 2 percent inflation, Abenomics 2.0 has been launched to boost Japan’s growth. A new round of three arrows has been launched, focusing more this time on domestic improvements such as healthcare and increase the dwinling birth rate. The bulk of the work remains with the Bank of Japan (BoJ). Governor Kuroda remains optimistic but the market expects the Japanese central bank to increase its stimulus program as it remains the only effective arrow in Abe’s quiver. Last year’s Halloween shock will not have a repeat, as the market is waiting for the BoJ to step up its efforts and fullfil Abe’s campaign promises.

Tuesday, October 6
8:30am CAD Trade Balance
8:30am USD Trade Balance
1:00pm EUR ECB President Draghi Speaks
Tentative JPY Monetary Policy Statement

Bank of England to Hold as UK Economy Slows Down

The Bank of England was optimistic about the UK economy at this time last year, but its head Economist Andrew Haldane started to see the economic clouds signalling the coming storm. At one point the U.K. economy was enjoying a healthy growth spurt that put it well ahead of even the U.S. and the first developed economy that would raise rates. The commodity rout and overall global growth forecast downgrade has pushed that back into next year. The BOE will publish its rate statment and in an effort to increase transparency it will also publish the minutes from the monetary policy commitee meeting.

FOMC Minutes to Reveal Little as NFP Shifted Paradigm

The dissapointing U.S. jobs report validates the decision by the Federal Reserve to hold rates unchanged, but the minutes from the meeting will be analysed to see how did only one member dissent (Lacker) while outside of the Federal Open Market Committee (FOMC) statement there were lots of hawkish support for a rate hike before 2015, yet no votes to think that scenario was possible. The Fed can learn a big lesson from the BOE. Releasing the minutes at the same time as the rate statement increases transparency and gives the market one less day of volatility on a subject that in today’s market is stale a day after, let alone two weeks.

The problem with the Fed giving so much weight to the employment component was that it cannot keep rising forever. There is a point where gains will be marginal and as seen today some setbacks. The Fed was right to base most of rate rise rhetoric on employment, but it might have missed a window to hike while still having the support of strong jobs data. Overall the Fed does not want to lose more credibility and it has chosen to err on the side of patience than to backtrack on a commitment if economic conditions deteriorate.

Thursday, October 8
7:00am GBP MPC Official Bank Rate Votes
7:00am GBP Official Bank Rate

8:30am USD Unemployment Claims
2:00pm USD FOMC Meeting Minutes