Event risks for the week ahead - TDS

Mark McCormick, Research Analyst at TDS, suggests that the lighter data calendar this week will see market risks shift to idiosyncratic risks and after following last week’s central bank bonanza, the market will start to ponder whether political risks will start to upset the subdued macro conditions.

Key Quotes

“The election is just a little more than a month away and with the polls still tightening, US election risks are likely to shift onto investors radar screens. For the majors, this backdrop favors more defensive strategies and could support the USD against North American currencies (and smaller, open countries) even though its response could be more mixed against the EUR, JPY and other safe havens.

The BoJ will also get more attention this week. The week kicked off with Kuroda’s speech about monetary policy. The speech noted that QE is likely to play a smaller role in the policy framework, suggesting less scope for balance sheet expansion down the road. The market still continues to questions the credibility of the policy framework to achieve the 2% inflation target, boosting JPY. Increased political uncertainty could see demand for safe havens with a downside break of 100 in USDJPY likely on tighter US poll numbers. We like short CADJPY on US election risks.

We also have a host of Fed speaker on the wires this week. Today we get Kaplan (non-voter, hawk) and Tarullo (voter, dove). Later this week we get Fischer and Yellen (Wednesday and Thursday). Yellen will testify in front of the House Panel on Bank Regulation. Meanwhile, we will hear from Bullard (voter, dove), Evans non-voter, dove), Mester (voter, hawk), George (voter, hawk) on Wednesday. More speakers on Thursday so market likely to pay close attention for messages about the scope for possible hikes this quarter.

For CAD, the market focus turns to Poloz, data, and OPEC. Data key for policy outlook with July GDP report likely to set the tone for October MPR. The 12mma shows growth remains quite soft. Weaker data, in turn, has put the BoC back in play so markets likely to watch Poloz carefully for signs that Bank is considering a cut. CAD tends to rally into unofficial OPEC meetings, but the rally is short-lived. We also think USDCAD will start to pay closer attention to US election risks so a pickup in volatility could see USDCAD on brief, shallow consolidations in the pair.”