Week Ahead in FX: US Retail Sales Next Hurdle for December Rate Hike

Global and U.S Economic Factors Could Derail the December Rate Hike

The USD continues to advance against all pairs since the October Federal Open Market Committee (FOMC) statement put the December meeting back in play as a possibility of announcing a higher U.S. benchmark interest rate. Days later Fed Chair Janet Yellen said that a December rate hike was a “live possibility” and Friday’s non farm payrolls (NFP) report has boosted the probability of the first interest rate hike in a decade with an above expectations 271,000 new jobs added to the American economy.

Since foregoing the use of forward guidance the Federal Reserve has opted for a data dependency model that has created higher volatility as the market is uncertain where the data is pointing to. This time around the data and the Fedspeak are lining up into a higher rate outcome that has more than 50 percent probability according to the CME data. There are still hurdles that must be cleared for this to happen and this week the resolve of the Fed will be tested by external and internal factors.

The Chinese slowdown is the biggest factor that has dragged down global economic performance. Inflation and industrial production will be reported this week out of China and investors should focus on what the reaction is from markets and policy makers. Chinese CPI will be released on Monday, November 9 at 8:30 pm EST and Industrial production on Wednesday, November 11 at 12:30 am EST. The U.S. retail sales have put a stop to more than one USD rally. The importance of strong consumer demand as evidenced by sales is a big indicator that will factor in the Fed’s decision to pull the trigger in December. U.S. retail sales will be published on Friday November 13 at 8:30 am EST.

Monday, November 9
7:30pm AUD NAB Business Confidence
8:30pm CNY CPI y/y
Tuesday, November 10
3:00pm NZD RBNZ Financial Stability Report
3:05pm NZD RBNZ Gov Wheeler Speaks
Wednesday, November 11
12:30am CNY Industrial Production y/y
4:30am GBP Average Earnings Index 3m/y
4:30am GBP Claimant Count Change
5:30am GBP BOE Gov Carney Speaks
8:15am EUR ECB President Draghi Speaks
7:30pm AUD Employment Change
Thursday, November 12
8:30am USD Unemployment Claims
Friday, November 13
2:00am EUR German Prelim GDP q/q
8:30am USD Core Retail Sales m/m
8:30am USD PPI m/m
8:30am USD Retail Sales m/m

Chinese Inflation Expected at 1.5%

China’s consumer price index (CPI) rose by 1.6 percent in September when compared to a year ago. The forecasts called for a change of 1.8 percent. The cooling inflation measure is another indicator that points to the slowdown of the Chinese economy. There was optimism back in September when the August data was released and touched 2.0 percent for the first time in almost a year. As global demand falls, China has looked inward to grow the economy. Lower consumption as evidence by the CPI index could force the hand of the People’s Bank of China (PBoC) to stimulate the economy yet again in the search for growth. The forecasts this time are focused on 1.5 percent inflation growth.

Industrial production in China fell to below 6 percent monthly growth last month with a reading of 5.7 percent. The Minister of Industry and Information Technology has gone on the record to say he expects the 2015 annual growth to be above 6 percent. That is not a very encouraging forecast, given that last year the industrial production showed 8.3 percent growth. Again sluggish demand abroad and at home has hurt output.

China events to watch this week:

Monday, November 9
8:30pm CNY CPI
Wednesday, November 11
12:30am CNY Industrial Production

German Economy Navigating VW Scandal and Refugee Debate

The U.K. Chancellor George Osborne described the economies of Germany and the United Kingdom as the beating heart of Europe. There is no doubt that the German economy has been the growth engine of the European Union but as the U.K. continues to show a steady pace, the engine is having some internal issues. The Volkswagen emissions scandal has dealt a massive blow to one of the strongest sectors of German manufacturing.

The stock market has been rising boosted by the quantitive easing program launched by the European Central Bank in March. Keeping rates low has made investors seek returns in the stock market. The rise of the USD versus the EUR has also made it easier for European companies to turn previous foreign exchange losses into gains as a weak EUR gives exporters a competitive advantage.

The German government expects growth of 1.7 percent for this year and 1.8 percent for 2016. The growth forecasts have been cut citing the negative impact of the slowdown in China and emerging market rout which will translate in lower German exports.

Merkel Faces What Could be Her Biggest Political Challenge

Politically Germany was the standard of stability. German Chancellor Angela Merkel had an excellent track record of guiding the nation through several intense debates. It has to be said that most of the debates were triggered by external factors such as the Greek crisis. This time around the refugee crisis has given detractors of Merkel enough political and social ammunition to stage a political attack that threatens to oust the longest serving leader in Europe. Germany had remained immune to the social backlash that was seen in France, Spain, Italy and Greece. The patient is showing signs of infection and if it wasn’t for Merkel at the helm the outcome would be the same as those other examples as voters decided to change leadership by electing a new party.

German events to watch this week:

Friday, November 13
2:00am EUR German Prelim GDP q/q

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

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 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