Week Ahead: China Growth to Set Pace in FX

China Growth, Canadian and European Central Banks on Deck

The USD depreciated across the board as retail sales and manufacturing numbers had a negative impact on interest rate hike expectations. The Federal Reserve has been second guessed since June on failing to deliver the much-awaited policy move. Fed member’s statements remain optimistic, but yet the vote count in the meeting minutes has not shown a rate hike is close to happening. The Fed has gone from forward guidance to almost no guidance and in turn it has spiked volatility as the market is uncertain about the central bank’s next move.

The economies of China and Europe are two of the major factors cited by the Fed when analyzing threats to the growth of the American economy. Both will feature this week as China will release its gross domestic product (GDP) for the third quarter of the year. The GDP and the industrial production data will be released on Sunday, October 18 at 10:00 pm EDT.

The Fed’s indecision has put more pressure on other central banks to step up their efforts. With rising currencies and a need to stimulate their economies the Bank of Canada (BOC) and the European Central Bank (ECB) will announce benchmark rate changes this week. The BOC will publish its rate statement on Wednesday, October 21 at 10:00 am EDT. The ECB will be the focus of the FX market on Thursday, October 22 at 7:45 am EDT. There are no changes expected from either central banks, but the market will be looking for further insights into their next moves as it becomes clear they will have to act ahead of the Fed.

China Tries to Deflate Expectation ahead of GDP Release

The evidence all points to a slowdown in the growth of the number two economy in the world. Chinese GDP figures are expected to be below 7.0% and could touch 2009 crisis levels. The Chinese government has stated repeatedly that there won’t be a hard landing, and that lower growth is expected and can be managed. A soft landing. Various global banks have backed those assumptions and even the International Monetary Fund has said that a slowdown is only natural.

With so much riding on a pickup in the growth rate of China from commodities to capital flows a soft landing for China can translate into a hard landing for emerging markets and derail the best laid plans for the Federal Reserve.

The GDP published by the National Bureau of Statistics has not fallen below 7.0 percent since the first two quarters of 2009, and even then it managed to bounce back into double digit territory before the end of the year. The current forecasts call for a prolonged stay below 7.0 percent, despite the comments from Premier Li Keqiang that structural reforms can get China back into a faster pace of growth.

Sunday October 18
10:00pm CNY GDP
10:00pm CNY Industrial Production

BOC Rate Announcement to Follow Federal Elections

Canadian voters will go to the polls on Monday, October 19. Advance voting stats are pointing to a new Liberal government in place unless there are new developments in the close of the campaign. The economy has been a hot topic in elections debates and political party platforms, but the elections have done very little to create uncertainty around the CAD. No matter the winner the Canadian economy will continue to face the same adverse factors of low commodity prices, the slowdown in China and a rate divergence environment.

The Bank of Canada has been a solid steward for the economy. The central bank has cut rates twice in 2015 and in hindsight those were good pro active moves as Governor Stephen Poloz had to anticipate a lack of action from the Federal Reserve to give Canadian exports a price advantage to offset the losses record in the energy sector. The benchmark rate in Canada is 0.50 percent. There are no changes expected in the remaining of the year, and economists forecast the next move will be upwards, but only until 2017. The economic fate of Canada is deeply linked to that of the U.S. recovery.

There are question marks around the Trans Pacific Partnership that might come to the fore if the deal is not ratified by a new government. The TPP offers Canada an opportunity to diversify away from a U.S. dependency, but there will be caveats on what Canada has to give up in order to unlock those gains.

Wednesday October 21
10:00 am CAD BOC Monetary Policy Report
10:00 amCAD BOC Rate Statement
10:00 am CAD Overnight Rate
11:15 am CAD BOC Press Conference
Thursday, October 22
8:30 am CAD Core Retail Sales m/m
Friday, October 23
8:30 am CAD Core CPI m/m

Deflation Threat and Fed Patience Pressure ECB

Annual inflation fell to a negative reading in September (–0.1 percent). The Euro zone economy as a whole has failed to gather momentum after the ECB launched its 1.1 trillion-euro asset-purchase plan in March. Deteriorating macro conditions have not helped the central bank reach its inflation objectives and more stimulus will be needed. The ECB by design is not the quickest to reach such monumental decisions, but the pressure is growing as cracks in German confidence following the V.W. scandal have impacted the engine of European growth.

The meeting this week could be too early for a new round of stimulus with most of the estimates making December a more likely candidate. The ECB would also hope the Federal Reserve eases some of that pressure by raising rates sooner, but that is a long shot given the latest American economic indicators.

Thursday, October 22
7:45am EUR Minimum Bid Rate
8:30am EUR ECB Press Conference
Friday, October 23
3:00am EUR French Flash Manufacturing PMI
3:30am EUR German Flash Manufacturing PMI

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