Week Ahead in FX: Fed Minutes and China Manufacturing in Focus

U.S Data Dependency Looks to FOMC Minutes

Starting with the U.S. non farm payrolls report, China’s devaluation of the Yuan and the release of U.S. retail sales numbers investors have been getting mixed signals regarding the Federal Reserve’s decision on September 17. Employment continues to be the strongest performer for the U.S. economy, but the decision by China’s central bank could trigger a more patient Federal Reserve.

The minutes from the Federal Open Market Committee (FOMC) minutes from July 29 will be published on Wednesday, August 19 at 2:00pm EDT. The statement release following the announcement by the central bank to keep rates at a record low provided very little guidance. Data dependency continues to be the name of the game, with a special focus on employment indicators and inflation. The notes from the FOMC will feel a bit outdated as the Fed member opinions have to be reframed by the Chinese Yuan devaluation and its potential impact on the U.S. economy.

Monday, August 17
9:30pm AUD Monetary Policy Meeting Minutes
Tuesday, August 18
4:30am GBP CPI y/y
8:30am USD Building Permits
11:00pm NZD Inflation Expectations q/q
Wednesday, August 19
8:30am USD CPI m/m
2:00pm USD FOMC Meeting Minutes
Tentative JPY Monetary Policy Statement
Thursday, August 20
Tentative JPY BOJ Press Conference
4:30am GBP Retail Sales m/m
8:30am CAD Wholesale Sales m/m
8:30am USD Unemployment Claims
10:00am USD Philly Fed Manufacturing Index
9:45pm CNY Caixin Flash Manufacturing PMI
Friday, August 21
3:00am EUR French Flash Manufacturing PMI
3:30am EUR German Flash Manufacturing PMI
8:30am CAD Core CPI m/m
8:30am CAD Core Retail Sales m/m

Economists polled by Reuters see a 55 percent chance of the Federal Reserve raising rates twice in 2015. September has fallen from the top of the list with the survey showing a 60 percent chance of the monetary policy tightening cycle starting in the fall. The end of the year shows a 85 percent chance and with this week’s China intervention and strong, but inline with forecasts, U.S. retail sales have diminished the probability of a September rate hike. Analysts have pointed out that a September hike could lead a follow up in December. The September and December Federal Open Market Committee (FOMC) meetings are favoured due to the fact that both are followed by a press conference. Given the market importance of the first Fed rate hike since 2006 it is expected chair Janet Yellen will want to address questions from the financial press to better communicate the central bank’s intentions.

The Bank of England implemented a change in how it publishes the minutes from its monetary policy committee. The BoE is foregoing the two week waiting period in favor of an immediate release after the rate announcement. Given the Federal Reserve has been caught by this two week lag where market conditions have changed dramatically from rate announcement to member minutes it could be a matter of time before the Fed borrows from the Old Lady’s best practices.

Central Bank events to watch this week:

Wednesday, August 19
2:00pm USD FOMC Meeting Minutes
Tentative JPY Monetary Policy Statement

*All times EDT
For a complete list of scheduled events in the forex market visit the MarketPulse Economic Calendar

US Manufacturing Index to Suffer Strong USD

The Federal Reserve Bank of Philadelphia conducts its own survey of manufacturing conditions to gauge the health of the industry and their forecasts on items such as spending, hiring and investment. Forecasters have had a hard time trying to estimate how the manufacturing base will react as uncertain times have led to erratic estimates. The July index missed expectations with 5.7 reading, the lowest since March. A figure above 0 is considered to be improving conditions, but in this case the market anticipated a 11.9 Philly Fed manufacturing index.

The strong USD and a cautious American consumer have posted soft retail sales which in turn have made manufacturers worsen their outlooks. Competition from abroad at lower prices helped by depreciating currencies have already taken a bite from exports and its a trend that will continue as long as the Federal Reserve maintains its intentions to raise interest rates this year.

China Manufacturing PMI to Show Devaluation was Needed

The decision from the People’s Bank of China (PBOC) to devaluate the Yuan came as surprise due to the timing of the announcement, but the all-known fact is that the Chinese economy is slowing down and the government has tried various ways to stimulate it back into growth. The devaluation of the currency joins liquidity injections, deposit rate cuts and other measures that are intended to boost internal demand.

The advance manufacturing purchasing manager’s index (PMI) will be published on Thursday, August 20 at 9:45pm EDT. This is an important leading indicator that collects the ratings of more than 400 purchasing managers on business conditions. The third party Caixin Markit flash manufacturing PMI has shown a contraction since March with a 49.2 reading and while the number stayed close to the 50 mark, which is considered an expansion last month it fell to 48.2 and was latter revised even lower to 47.8.

Existing conditions were adverse for the economy and signalled a further slowdown which is what has prompted the Chinese government to intervene regardless of the political risk as the U.S. has always been a critic of an undervalued Yuan. The central bank and the government are not done as the measures will not be enough as the devaluation sent a powerful message but did not give Chinese exporters a major edge as competing nations were also hit by depreciation as faith in the emerging markets continues to erode.

European PMIs Still Reeling from Greek Agreement Headache

German and French flash manufacturing PMIs disappointed last month with slightly lower than anticipated surveys. France fell below 50 with a 49.6 reading after two consecutive months of breaking expectations. Germany is still above 50 with a 51.5 level but after the unexpected deterioration of German ZEW sentiment it seems that the aftershocks of the Greek debt crisis are still lingering even as a third bailout is still to be agreed. German investor sentiment has had five consecutive declines. Investors are still confident that Germany is doing all it can to keep the economy as the engine of European growth, but the current macro conditions don’t favour an optimistic view.

Global manufacturing events to watch this week:

Thursday, August 20
10:00am USD Philly Fed Manufacturing Index
9:45pm CNY Caixin Flash Manufacturing PMI
Friday, August 21
3:00am EUR French Flash Manufacturing PMI
3:30am EUR German Flash Manufacturing PMI

*All times EDT
For a complete list of scheduled events in the forex market visit the MarketPulse Economic Calendar

This article is for general information purposes only. It is not investment advice or a solution to buy or sell securities. Opinions are the authors; not necessarily that of OANDA Corporation or any of its affiliates, subsidiaries, officers or directors. Leveraged trading is high risk and not suitable for all. You could lose all of your deposited funds.

Alfonso Esparza

Alfonso Esparza

Senior Currency Analyst at Market Pulse
Alfonso Esparza specializes in macro forex strategies for North American and major currency pairs. Upon joining OANDA in 2007, Alfonso Esparza established the MarketPulseFX blog and he has since written extensively about central banks and global economic and political trends. Alfonso has also worked as a professional currency trader focused on North America and emerging markets. He has been published by The MarketWatch, Reuters, the Wall Street Journal and The Globe and Mail, and he also appears regularly as a guest commentator on networks including Bloomberg and BNN. He holds a finance degree from the Monterrey Institute of Technology and Higher Education (ITESM) and an MBA with a specialization on financial engineering and marketing from the University of Toronto.
Alfonso Esparza