If this week does not do it for capital markets then very little will. It’s a heavy central bank week schedule, packed tightly with manufacturing, services, and composite purchasing managers’ indexes (PMI) that will give investors an update on business activity. This monumental week ends with labor market reports for both the U.S. and Canada. All along, this market has sought sustainable volatility, not just this intraday “hit and miss” that investors have been conforming to for the first half of 2014. This week has the potential to set the tone for the remaining quarters. If it’s a miss, then the World Cup gets a bit more interesting.
Imagine, of all the weeks what a strong nonfarm payrolls report (NFP) could do? It could easily drown out some of the highly anticipated objectives from the European Central Bank (ECB) this Thursday. So far, growing expectations assuming that ECB President Mario Draghi and company will cut rates and introduce further liquidity has buoyed equities and weakened the EUR nicely over the past few weeks (€1.3995-€1.3585). If the ECB disappoints, the market will naturally be expecting to aggressively give back some of this trade. How much has the market priced in for these anticipated actions? By week’s end, the EUR could easily find a relief bid if the ECB is not aggressive enough for the market’s liking. Under this scenario, the EUR will be looking toward €1.4000 again as the ECB loses credibility.
Central Bankers in the Spotlight
Investors will be required to focus on central bank decisions and statements, not speakers. The ECB will dominate the proceedings this Thursday. Expect the market to be focusing on what’s delivered beyond the expected rate cut and or negative deposit rate. Another Long Term Refinancing Operation is being highly touted, tied to perhaps some Asset-Backed Security purchases and/or small to midsized enterprise program. Currently, the market has high expectations for an aggressive opposition to the euro’s low inflation and consistent growth problem. This opens up a huge potential for market disappointment. Negative rates have probably the biggest potential for altering rate differentials against the EUR. The problem? The fixed-income and money markets have already deeply discounted such a move, so much so that market reaction on a risk-reward basis would probably favor long EUR’s.
The ECB is not the only central bank show in town this week. The Reserve Bank of Australia (RBA) appears tomorrow and remains firmly in the “hold” camp. Governor Stephen Poloz at the Bank of Canada gets his turn Wednesday, and is expected to be on hold due to being less worried about low inflation. The Bank of England’s Governor, Mark Carney, defines his strategy on Thursday, just ahead of Draghi, and is expected to remain on hold with no statement. In emerging markets, the Reserve Bank of India takes center stage Tuesday. And finally, away from scheduled meetings, a percentage of the market anticipates the People’s Bank of China to take more targeted measures.
Already, China has kicked off the data-heavy week on Sunday with its official manufacturing PMI for May. The figure rose to a five-month high of 50.8, beating estimates for 50.6 and higher than April’s 50.4 reading. So far, the figures have helped spur broad gains for the dollar against most of the Group of Seven currencies. Yesterday’s release should provide some market reassurance that the Chinese economic growth is at least beginning to stabilize. This improved global risk sentiment is offsetting the current fall in commodity prices. A good example is to watch the AUD ($0.9257). Its value has not materially fallen despite the slump in commodity prices (gold $1,245). Eventually, negative commodity prices will have an effect, but that will only occur when investor risk attitude changes, perhaps on concerns about China and an on-hold RBA. Currently, risk is in vogue and appreciating the commodity sensitive currencies (CAD, AUD, NZD, etc.).
Data Deluge on Tap
It’s already been a downbeat start to a heavy week of European data, with the eurozone’s manufacturing PMI for May revised down to 52.2 from 52.5, largely reflecting weaker growth in Germany, Europe’s official backbone. However, this morning’s print is not all bad news for the currency bloc’s policymakers. Digging deeper, both the Dutch and Spanish recorded stronger activity on the month. Regional employment was up again, while firms raised prices for the first time in three months. In the U.K., the May Markit manufacturing PMI came in on the nose at 57, a slight dip from the previous report (57.3). The U.K. economy, the darling of the G7, continues in expansion territory. Other data released happened to show that in April British consumer and mortgage lending both fell, while mortgage approvals slowed for that month.
Stateside, investors await the Institute for Supply Management’s manufacturing index for May to kick-off the week. It is expected to show an improvement to 55.5 from 54.9, confirming the U.S.’s recovery from this past winter’s disruption. Tomorrow’s eurozone flash Harmonized Index of Consumer Prices may help to support the ECB’s need to act. Aussie trade stats and the Canadian Ivey PMI are due on Thursday and will surely give it to the commodity sensitive currency pairs. The U.S. will publish its weekly report on initial jobless claims on the same day and ahead of Friday’s NFP, where any unemployment rates could mute the ECB’s efforts.
There is certainly enough to keep capital markets on its toes all week. Currency ranges will remain somewhat contained until the various data points become available. Let’s hope the obvious does not become too predictable, if so, then forex market interest and participation will certainly wane.
Focus On Draghi-Will he deliver?