The week of January 20, 2020 will open with a renewed batch of event risk as Central Banks take center stage with monetary policy decisions, along with an avalanche of economic data that will likely keep investors glued to their monitors for this new week of trading.
The first central bank to make a policy announcement will be the PBoC (People’s Bank of China) who will publish their new policy rate for commercial loans (Loan Prime Rate) on Monday, which most investors anticipate will remain unchanged. LPR is the bank’s newly reformed benchmark rate that was recently enacted to lower borrowing costs for small businesses in an attempt to shore up the sputtering economy. With last week’s signing of the US-China Phase One Trade Agreement, the Red Dragon has considered scaling down on further easing measures, and prefer to apply other discretionary measures to increase financing to the private sector.
The Bank of Japan (BOJ) is the next central bank in line to announce its monetary policy decision on Tuesday. We expect no clear action in rates or the QQE with yield curve control, partly due to the nation’s improving economic backdrop and the government’s big spending package, which is expected to boost growth in their economy. Since the BOJ has exhausted most of its tool arsenal to ease rates, the better-than-expected economic growth will allow the institution to preserve some of its limited firepower for a stormy day. The central bank’s current interest rate still remains at -0.7%. Given the recent weakness of the yen, the BOJ will likely keep its powder dry for some time.
The Japanese Yen is expected to remain composed during the central bank’s announcement, and only trade in response to risk appetite, since it is a safe haven currency. With that being said, the near-term risks surrounding the yen remains tilted to the downside as the two biggest threats to global markets (Trade War & Brexit) have recently subsided. However, in the distant future, Brexit fears could return alongside caution ahead of the US presidential election. This will be magnified if one of the progressive candidates (Sanders or Warren) secure the Democratic nomination.
For this week of trading, UK Labor Market figures for November and UK Flash PMIs will be headlining for the week, with the latter data scheduled to hit wires on Friday. With Brexit out of the spotlight for now, pressure continues to climb in regard to the upcoming Bank of England (BOE) decision on January 30th, and the prospect of a rate cut. Surprising remarks from several BOE officials, including Governor Carney, were quite dovish and kindled expectations for a rate cut. This Tuesday’s UK Labor Market report may provide some clues on what the central bank will do with their interest rate. If we continue to witness deceleration in UK Average Earnings, which is an inflation measurement, this may warrant the central bank to become more accomodative in their monetary policy. UK wage growth is expected to tick higher at 3.4%, with the unemployment rate also ticking higher at 3.9%.
UK GDP growth arrived at at 0.6%, in annual terms for November, which is the lowest figure since 2012, when fears of contagion from the European sovereign debt crisis spilled over into Great Britain. Analysts are now pricing in a ~67% probability for an immediate rate cut at the January 30th meeting, but UK policymakers will draw their conclusions following this Friday’s preliminary (flash) PMIs for January. If there is not a significant rebound in PMI data that will relieve BOE members concerns, then the likelihood of a January 30th cut could spike higher, which in turn will be negative for the sterling.
The Bank of Canada’s monetary policy meeting is on Wednesday, and although they are expected to keep rates on hold, comments from policymakers could still generate volatility for the loonie. In a nutshell, the Canadian economy is in a solid place, with inflation approaching near the bank’s 2% target, with wage growth at a healthy pace, and the housing market reporting solid gains. Canada’s recent jobs report was also encouraging.
However, there have been some alarming signs with consumption significantly dropping towards the end of the year, with both business investment and consumer confidence showing initial signs of sluggishness. As of late, the recent business survey from the BOC itself, was mixed despite easing trade concerns, which could suggest more softening in the future.
With Wedensday’s BOC meeting, the market has already priced in the likelihood of no change in monetary policy. Markets forecast a 30% probability of a rate cut by July, so if there are no surprises on Wednesday, the loonie could slightly lift higher following the announcement. However, if BOC policymakers appear more dovish by signaling an earlier than anticipated rate cut if consumption weakness persists, then the loonie could tank lower following the bank’s announcement.
CPI inflation figures for December are also due out on Wednesday, shortly before the policy decision is released, while Canadian retail sales figures for November will be released on Friday.
2019 closed the year with a hopeful & positive outlook for the Eurozone, amid improving optimism that some of the geo-political concerns (ie. US-China Trade War and Brexit risks) were finally dissipating. There was also initial signs from Eurozone PMI data that economic growth was stabilizing into the year’s end, following a period of intense slowdown.
Unfortunately, investors have been focusing too much on positive developments without carefully analyzing the data. Growth may be improving, but at a startling low level & slow pace, so this is not as comforting as investors presumed. Eurozone Manufacturing data is still within contraction territory, and with the looming threat of US tariffs on European automobiles, this could inflame more downside risks for the bloc. In addition to this, Brexit worries are still not off the table cand could return when EU-UK negotiations begin again.
With that being the case, the European Central Bank (ECB) is unlikely to signal anything at it’s first policy meeting, with ECB President Christine Lagarde, on Thursday. While the clouds have somewhat cleared on the euro area growth front, and core inflation has shown some toughness as of late, we still believe it will be too early for the ECB to offer a more hawkish tone on its growth outlook at Thursday’s meeting. Even if the opposite were true, there would still be limited upside in the euro.
Rather, a much bigger determinant in the fibre’s broader path & direction will be the January Flash PMI’s that are scheduled to be released on Friday. Friday’s PMI data will offer some important clues on how the global economy, and in particular manufacturing sector, started 2020. In the euro area, we are hoping for a small improvement in the manufacturing PMI to 47.1, as this will signify the worst of the industrial slump is behind us and that could help to establish a firmer floor for the single currency.
Marvin Perry has been an active trader within the Forex market since 2010. He attended the University of Illinois in Urbana/Champaign, and graduated in 2002 with a double major in Cell and Structural Biology and Chemistry. He currently serves as an FX instructor & Quantitative Analyst for the Forex Anatomy Private Trading Community called "The Lab", where he conducts live weekly trading webinars & instruction on Fundamental Analysis & Inter-Market Interpretations of dynamic asset classes and their influence on currencies.