Central Banks and Jobs to Squeeze Currency Positions

It’s another busy week ahead for central banks with the Reserve Bank of Australia (RBA), the Bank of England (BoE), and the European Central Bank (ECB) holding their regular policy-setting meetings. Governor Glenn Stevens at the RBA will get to put the market through its paces come Monday evening. The governor has a tendency to try and talk the Aussie dollar down (AUD$0.8744) at every opportunity. Perhaps he will try and match his colleagues at the Reserve Bank of New Zealand who did a good job talking the Kiwi dollar (NZD$0.7782) down last week with their dovish comments.

Both the BoE and ECB will be keeping the market on their toes come Thursday. Will we get further directives from ECB President Mario Draghi about the eurozone’s proposed quantitative easing (QE) program? Growth momentum in the U.S. has been relatively robust. The eurozone, on the other hand, continues to deliver relatively weaker economic data. This will obviously put further pressure on the ECB to do more easing, especially following the Bank of Japan’s (BoJ) move late last week. For the sovereignty issue program, expect that to be delayed until the European Union political quagmire is resolved.

Finally, the market gets to close out this busy week with the ‘granddaddy’ of economic indicators: U.S. nonfarm payrolls. Just north of the border, the Canadian employment numbers will be released at the same time. With Federal Reserve Chair Janet Yellen and her colleagues changing tack by pumping up the U.S. labor situation, Friday’s jobs report becomes that much more significant for the mighty dollar. Any slight deviation from expectations should have a far greater market impact than recent U.S. employment releases. So, no matter what, investors should be expecting the market to be on tenterhooks come Friday.

Chinese PMI Data Disappoints

It’s not a surprise to see the markets start this week in a consolidating mood, especially after last’s week’s euphoria following the surprise BoJ ease that led the big dollar to a multiyear high against a host of currencies. Japan’s surprise stimulus move allowed global equities to rally on the back of higher risk sentiment, commodity prices slumped because of a stronger greenback, while fixed-income traders second guessed the shape of their own curves.

Nevertheless, various sovereign bond prices are advancing this morning (particularly Bunds and Treasurys) on the back of China’s purchasing managers’ index (PMI) data coming in soft over the weekend. The manufacturing print came in at a five-month low (50.8 versus 51.2 estimate), which happens to be the third straight month-over-month decline. The non-manufacturing print managed to record a new nine-month low (53.8 versus 54.0 prior). More importantly for now, the headline releases still remain in expansion territory. Also noteworthy, the HSBC manufacturing PMI matched consensus (50.4) and hit a three-month high, which also happens to be below the official print. The market’s read is that despite the manufacturing sector continuing to stabilize on the month, the consecutive momentum has “likely weakened” in the world’s second-largest economy.

Lackluster Eurozone Data Emerges

Major European PMI manufacturing data for October out this morning is mixed. The 18-member single currency went into the last month’s PMI run around €1.2495, and has come out, thus far, relatively unscathed despite the mixed bag of headlines. Spain was unchanged from September at 52.6, Italy slipped into contraction at 49.0 from 50.7, and France dipped to 48.5 from 48.4. Germany is back in expansion territory at 51.4 from 49.9, while the eurozone as a whole improved to 50.6 from 50.3. With numbers like these, the market genuinely feels that European QE is inevitable or unavoidable at some future point; the ECB will eventually be squeezed to act radically, especially when other major central banks keep lending support. On Thursday, the market expects Draghi to send a strong signal that significant balance sheet measures should be coming as early as next month.

The market is short the EUR and it feels that too many individuals expect the single currency to make a “beeline” for July 2012 lows near €1.2000. Directional play rarely gets to work out that easily. Currency moves do not go in a straight line and the longer that EUR gets to waffle near its yearly lows, the more impatient the weaker EUR shorts become. Despite the EUR heading toward its two-year old extremes, the market still requires a healthy shakeout to lend stronger support for its negative momentum trend. Do not be surprised to see better levels to sell the single currency. But remember, bleaker eurozone growth prospects and the market’s dominance of negative EUR sentiment would suggest that any EUR rallies could be rather fleeting.

U.K. Economy Faces Export Headwinds

A stronger-than-expected U.K. manufacturing PMI report this morning (53.2 versus 51.5) will most likely be ignored as the market’s attention will be focused on the country’s weakening export picture. New-export orders PMI happened to fall to 48.3 from 49.6 in September and are atop of its lowest level in nearly two years. The weaker data should lend a hand to the BoE doves and keep U.K. rates “lower for longer” come decision time this Thursday.

Content 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 Business Information & Services, Inc. or any of its affiliates, subsidiaries, officers or directors. If you would like to reproduce or redistribute any of the content found on MarketPulse, an award winning forex, commodities and global indices analysis and news site service produced by OANDA Business Information & Services, Inc., please access the RSS feed or contact us at info@marketpulse.com. Visit https://www.marketpulse.com/ to find out more about the beat of the global markets. © 2023 OANDA Business Information & Services Inc.