Week Ahead in FX: Strong NFP Could Not Undo ECB Disappointment

EUR/USD will End Week above 1.08 Even as the US Added 211,000 Jobs

The highlight of the week in the forex market was not the release of the non-farm payrolls (NFP), which again posted a strong over 200,000 new jobs, but the failure to communicate between the European Central Bank (ECB) and the market. The central bank had managed to convince the market that this was not the central bank of old that dealt with half measures. ECB President Mario Draghi had shown willingness to commit and expressed with certainty that policymakers would do “whatever it takes” and do “what it must”. On Friday ECB vice president Victor Constancio laid the blame on the market for getting their expectations wrong. Even after a strong NFP the EUR has appreciated 2.6 percent and has made next year even harder for the European Central Bank to achieve its inflation objectives.

The Reserve Bank of New Zealand, the Bank of England and the Swiss National Bank will be the highlights on the central bank front next week. Out of the three the RBNZ could modify its benchmark interest rate with a 25 basis point cut. December was always going to revolve around the Fed rate hike. A strong NFP was another stamp of approval on what it seems a foregone conclusion. The U.S. retail sales to be released on Friday, December 11 at 8:30 am are not expected to derail the path towards the Federal Open Market Committee (FOMC) statement on December 16.

Monday, December 7
7:30 pm AUD NAB Business Confidence
Tentative CNY Trade Balance
Tuesday, December 8
4:06 am JPY BOJ Gov Kuroda Speaks
4:30 am GBP Manufacturing Production m/m
8:30 am CAD Building Permits m/m
12:50 pm CAD BOC Gov Poloz Speaks
8:30 pm CNY CPI y/y
Wednesday, December 9
3:00 pm NZD Official Cash Rate
3:00 pm NZD RBNZ Rate Statement
3:05 pm NZD RBNZ Press Conference
7:30 pm AUD Employment Change
7:30 pm AUD Unemployment Rate
Thursday, December 10
3:30 am CHF Libor Rate
3:30 am CHF SNB Monetary Policy Assessment
3:30 am CHF SNB Press Conference
7:00 am GBP MPC Official Bank Rate Votes
7:00 am GBP Monetary Policy Summary
7:00 am GBP Official Bank Rate
8:30 am USD Unemployment Claims
Friday, December 11
5:15 am EUR Targeted LTRO
8:30 am USD Core Retail Sales m/m
8:30 am USD PPI m/m
8:30 am USD Retail Sales m/m
10:00 am USD Prelim UoM Consumer Sentiment

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

Bank of England to Keep Rates on Hold

One of the reasons of the ECB debacle came as a surprise was the credibility President Mario Draghi had cultivated as a strong communicator. No other central banker was looked at for clues on the monetary policy moves, specially in a hard to navigate European environment. Bank of England Governor Mark Carney is now the go-to guy for clarity and guidance. Chair Janet Yellen quickly learned from the fall out of her predecessor Ben Bernanke’s taper announcement that the less said the better, so that leaves the market with Governor Carney to restore some of the credibility of central banks when the spotlight is on the BOE on Thursday.

The Bank of England at one time had the inside track on raising rates after the Fed faltered, but it turned out that the United Kingdom’s growth also slowed down later that same year. There was a glimmer of hope for higher rates this year, but so far there is only one vote to increase rates. The main innovation to central bank communication this year belongs to the BOE. Publishing the minutes and MPC vote count at the same time as the monetary policy summary has brought central banking into the modern day, where even an incorrect article from a well known financial publication can have deep impact ahead of a central bank announcement. By publishing on the same day gone is the additional volatility two weeks later when some of the questions held by monetary policy members might not even be applicable.

The Bank of England stands between the ready to hike Federal Reserve and the accommodative ECB. If the U.K. economy does not shake off the “transitory” factors that are slowing the economy down and threaten to pull it into deflation it will be closer to Europe. There have been hints in the last month that the Old lady is more eager to inject stimulus than to tighten. Gone are the harsh words and threat of restrictions that would curb the real estate market. QE assets will not be sold until the benchmark rate in the U.K. hits 2 percent, and the market is forecasting it won’t happen in 2016. The Bank’s own forecasts put late 2016 as the first possibility.

Although there is no change expected to the U.K. interest rate there is the possibility that other MPC member will join Ian McCafferty in dissent. Martin Weale is the most likely candidate as he has voted to raise rates in the past, but the fact that his term finishes in July 2016 might hold him back from expressing his views to the market if he won’t be able to follow through beyond summer next year.

December Rate Hike Train to Make Symbolic Stop at Retail Sales

U.S. Retail Sales had a weak showing last month posting a 0.1 percent increment missing the expectations of a 0.3 percent rise. Auto sales were to blame as they had a significant drop. Core retail sales data that excludes auto fared only slightly better as it came in at 0.2 percent when 0.4 percent has been forecasted. The U.S. dollar depreciated as retail sales have been one of the consistently soft economic indicators, but even that same day the USD managed to regain the lost ground on the back of interest rate divergence expectations. The Federal Reserve has been strongly hinting at December to finally raise interest rates after disappointing in the June and September Federal Open Market Committee (FOMC) meetings.

Retail sales are forecasted to come in at 0.2 percent, and a 0.3 percent excluding the volatile auto component. The ECB communication failure has thrown a wrench in the trends heading into the end of the year. The positive non-farm payrolls report did not have the usual trading pattern as it took until later in the day for the USD to appreciate versus the EUR. The crowded EUR short trade ahead of the ECB announcement made for an ugly unwinding of positions when the market was disappointed by the half hearted stimulus effort and still have investors on their toes.

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