Week Ahead in FX: China Indecision Could Delay Fed Rate Hike

Only U.S. employment could Restore Fed to September Hike Timeline

Chinese officials learnt a big lesson on the speed of market reactions this week. The Chinese government miscalculated the effect of not announcing expected stimulus measures over the weekend and instead put forth a pension plan investment reform. The losses in capital markets going into the weekend had pressured the government into quick action. The devaluation of the Yuan had put the government in the driver’s seat only to be taught that as intervention was needed making a firm and bold statement is the way to go.

The People’s Bank of China (PBoC)made the awaited announcement later in the week, after the Chinese sell off had spread to global stock markets. The central bank cut interest rates and lowered the reserve ratio for banks in an effort to boost lending and stimulate growth. The stock market rout by itself was not a direct result of the slowing growth of the economy, but the governments reaction raised questions about China’s ability to decisively handle a crisis. There is no time to second guess.

The USD recovered from losses versus G10 currencies and will end up the week net positive against majors. Emerging markets had a week to forget as multi-year and historic lows versus the dollar were printed. Commodities were big casualties of Chinese indecision as even lower demand was estimated at time of record production. Central bank rhetoric from the annual Jackson Hole symposium will center on China and the looming decision from the Federal Reserve on when to finally start raising rates. Commodities and emerging markets are bouncing back from the China stock market crisis just in time for the U.S. non-farm payroll report next week.

Monday, Aug 31
9:00pm CNY Manufacturing PMI
9:30pm AUD Building Approvals m/m
9:45pm CNY Caixin Final Manufacturing PMI
Tuesday, Sep 1
12:30am AUD Cash Rate
12:30am AUD RBA Rate Statement
4:30am GBP Manufacturing PMI
8:30am CAD GDP m/m
10:00am USD ISM Manufacturing PMI
9:30pm AUD GDP q/q
Wednesday, Sep 2
4:30am GBP Construction PMI
8:15am USD ADP Non-Farm Employment Change
9:30pm AUD Retail Sales
9:30pm AUD Trade Balance
Thursday, Sep 3
4:30am GBP Services PMI
7:45am EUR Minimum Bid Rate
8:30am CAD Trade Balance
8:30am EUR ECB Press Conference
8:30am USD Trade Balance
8:30am USD Unemployment Claims
10:00am USD ISM Non-Manufacturing PMI
Friday, Sep 4
8:10am USD FOMC Member Lacker Speaks
8:30am CAD Employment Change
8:30am USD Non-Farm Employment Change
10:00am CAD Ivey PMI

There is no such thing as a slow week in the forex markets. Last week on paper looked like a good candidate with little market moving data on deck. The Chinese stock market and the tame first response by the government to contain the crisis changed all that. The USD was caught on the back-foot as the stock market sell off reached a global scale and investors looked for safe haven in the Japanese Yen and the European single currency. Gold gained versus the USD as uncertainty on a thin liquidity market combined for big losses for the big dollar who dragged emerging markets along for the ride.

The PBoC managed to appease the markets by doing what was expected and restored some stability. Commodities bounced towards the end of the week and stronger emerging markets benefited. The biggest casualty of the Chinese sell off might have been the September interest rate hike. The Federal Reserve has telegraphed for almost two years the end of low interest rates. The first time it did so it caused a tantrum in the markets as it announced its tapering of quantitive easing. The end of the tapering cycle started speculation of a tightening policy. The Fed has pointed to a “data dependent” monetary policy decision. The data has been mixed, earning the Fed and the USD some reprieve as the greenback has gained on interest rate divergence versus major currencies.

The June Federal Open Market Committee (FOMC) meeting was the most likely candidate, but the U.S. economy did not seem ready by the Fed’s estimations to handle a higher interest rate. Employment continues to be the strongest pillar of the U.S. recovery. Growth has stumbled with a horrible first quarter that has now been revised to just a bad one, but still the Fed waits. The Fed faces a missing the perfect window for a rate hike if it hasn’t done so already. Employment cannot continue improving at the same rate until it hits a wall as on paper full employment should be around the corner. Macro headwinds such as those out of Europe, Japan and right on cue: China have already delayed the Fed’s decision in June and now could have laid claim to September as well.

The non farm payroll report (NFP) will be published at 8:30 am on Friday, September 4. The U.S. economy has managed to record above 200,000 gains since the release on May 8 and an equal healthy figure is expected on Friday. The report will be heavily analyzed for signs of a strong recovery in all the components of employment and not just the top headline numbers like the unemployment rate and number of jobs. The quality of the jobs and the wage components should be more telling and could drive the USD higher. On the other hand a disappointing or mixed report will do the dollar no favors as if employment falters then the September rate hike will be off the table and the market will punish the USD.

USD events to watch this week:

Tuesday, Sep 1
10:00am USD ISM Manufacturing PMI
9:30pm AUD GDP q/q
Wednesday, Sep 2
8:15am USD ADP Non-Farm Employment Change

Thursday, Sep 3
7:45am EUR Minimum Bid Rate
8:30am EUR ECB Press Conference
8:30am USD Trade Balance
8:30am USD Unemployment Claims
10:00am USD ISM Non-Manufacturing PMI
Friday, Sep 4
8:10am USD FOMC Member Lacker Speaks
8:30am USD Non-Farm Employment Change

*

All times EDT
For a complete list of scheduled events in the forex market visit the [MarketPulse Economic Calendar](http://www.marketpulse.com/economic-events/)

USD/CAD Loonie Faces Big Week as Recession Looms
Canadian Data to Contrast with US Employment and Trade Figures

• Oil recovers, but not enough to stop Loonie drop
• China jitters remains, but Fed reaction three weeks away
• Canada data in lockstep with US

The CAD had a rough week as the Chinese stock market rout grabbed headlines and spread panic around the world. Canada was under attack from two fronts. Lower demand for commodities was expected after China was not able to contain a strong sell off in their local stock market. Safe haven flows pulled out of the USD and into more stable asset classes. U.S. data pointed to a strong economy that appreciated the American currency.

Canadian Elections Focuses on Recession

The long journey to elections started in Canada with one big salient point. Is Canada in a recession? The technical answer is no, or rather not yet. A technical recession is when the gross domestic product has negative growth for two consecutive quarters. Canada reports monthly GDP figures which make the speculation more straightforward. With only one month to be reported there is a high probability Canada will be in a recession. This is the argument from the two political parties hoping to wrest control of the nation from the Conservatives. The monthly GDP figures posted in June and July were both negative (–0.1% and –0.2%) There is still an outside chance that the actions of the Bank of Canada were enough to avoid a recession.

Proactive BOC Enough to Avoid Recession?

The Bank of Canada led by Governor Stephen Poloz has been proactive in trying to avoid a recession by cutting interest twice in 2015. While not possessing the rock start qualities of his predecessor, he has also been left to deal with a struggling Canadian economy when one of its biggest exports, oil, is experiencing a supply glut as producers are pumping record levels of crude.

Next week the Canadian economy will post several arguments for a recovery or a recession. As opposed to this week where there was little Canadian data on deck, the week of August 31 to September 4 brings major indicators out in the open. Of note for traders are the data indicators that share a release with its American counterpart such as employment and trade balance figures.

Canadian events to watch this week:

Tuesday, Sep 1
8:30am CAD GDP m/m
10:00am USD ISM Manufacturing PMI
9:30pm AUD GDP q/q
Wednesday, Sep 2
8:15am USD ADP Non-Farm Employment Change
Thursday, Sep 3
8:30am CAD Trade Balance
8:30am USD Trade Balance
8:30am USD Unemployment Claims
10:00am USD ISM Non-Manufacturing PMI
Friday, Sep 4
8:10am USD FOMC Member Lacker Speaks
8:30am CAD Employment Change
8:30am USD Non-Farm Employment Change
10:00am CAD Ivey PMI

*All times EDT
For a complete list of scheduled events in the forex market visit the [MarketPulse Economic Calendar](http://www.marketpulse.com/economic-events/)

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