FX weekly

Weekly market preview – 3 February 2014

January 31, 2014 by Joshua Mahony in FX weekly

The first week of the month means one thing, and that is a whole plethora of top tier economic releases and announcements to sink our teeth into. The US focus will be largely centered upon the jobs report due to be released on Friday. Meanwhile in the UK, the release of the three industry specific PMI figures will no doubt dominate proceedings in the early part of the week. Over in the eurozone region, Thursday’s ECB press conference takes on a heightened importance following the continued downward pressure seen in the inflation rate.

In Asia, the celebration of Chinese New Year and the spring festival mean that we are likely to see less activity from the region. Despite this, Saturday’s manufacturing PMI figure will be keenly followed given the impact the fall in the HSBC figure had upon the emerging markets. Finally, a busy week for Australia sees the RBA come back to the fore with the accompanying statement from Glenn Stevens likely to dominate proceedings.

US

A highly significant week ahead for the US economy, with the release of the ADP non-farm payroll figure leading the way to Friday’s jobs report climax. The impact the jobs data has had upon ongoing tapering has been absolutely crucial and thus the release of this weeks employment figures will give us a better idea of whether Yellen is likely to taper at her first meeting.

The ADP non-farm payroll is commonly seen as a poor man’s version of the headline figure owing to the lessened impact and questionable correlation. That being said, the importance of the ADP figure came into question over the last month. The release of the lowest non-farm payroll since mid 2012 was widely attributed to adverse weather seen across the US and drove the Fed to seek guidance from alternate employment measures including the ADP figure. The fact that the ADP non-farm payroll (highest since December 2011) and unemployment rate (lowest since November 2008) both came in very positively allowed the FOMC to conclude that significant strength remained in the US jobs market despite the fall in the non-farm payroll figure.

This month, expectations are somewhat lower, with a figure closer towards 191k being mooted following an impressive 238k last month. In my mind, anything around the 200k mark would be respectable and given that the last two releases have beaten estimates, I believe the jobs market is picking up strongly which could lead to third consecutive beat in this measure.

On Friday, the release of the fabled jobs report is likely to bring the most volatile period of the whole week, when the unemployment rate and non-farm payroll figures are released. As mentioned previously, the non-farm payroll figure came in substantially lower than expected last month, posting the lowest change in payrolls since mid 2012 at 74k. However, with no adverse conditions effecting this month’s figure, the expectation is for this measure to return to ‘business as usual’. Estimates point towards a figure closer to 185k, which would be somewhat short of the 200k+ seen prior to the big freeze. However, this would still point to a healthy range for the measure and would make a potential March taper highly plausible.

Much of that decision with respect to a March taper is also driven by the unemployment rate, which is also released on Friday. The unemployment rate has been utilised as a target under forward guidance for both the UK and US, showing the importance of this figure. Given the proximity of the current 6.7% rate of unemployment to the 6.5% threshold, any further fall would be highly significant to the markets. That being said, the outgoing Fed chair Bernanke has said that interest rates will remain at low levels for an extended period after the 6.5% threshold is reached.

As ever, it is worth watching out for some of the other statistics that are released alongside these two key figures, with the average weekly hours, average hourly earnings and participation rate all key in Fed understanding of whether there has been positive progression for workers in the US. As mentioned, the March FOMC meeting is going to be key going forward, given that there isn’t one scheduled for February. Thus this week’s jobs data will be one half of the new data being utilised by the FOMC for their next decision. For that reason, there is a possibility we could see less emphasis upon FOMC decision-making in this release and more upon the US economic health and potential impact to forward guidance.

UK

A major week in the UK economy, where the first half of the week will be dominated by the release of industry specific PMI figures, followed by the latest monetary policy statement from the Bank of England’s Monetary Policy Committee (MPC).

On Monday, the manufacturing PMI figure provides the latest outlook for an industry which behind services is the second highest contributor to the UK’s GDP figure. Much was made of the over-reliance of the UK economy on services following the 2007/08 crash and thus the ability to become stronger in areas such as manufacturing allow for greater stability going forward. As a proponent of 2013 Q4 GDP growth, the manufacturing sector contributed 0.10% of the 0.70% overall growth and for that reason, this survey is key to understanding how the sector will contribute going forward. Market estimates point towards a figure around 57.0 from 57.3 last time which would represent the second consecutive fall in the measure.

On Tuesday, the construction PMI figure is released, following the news that it was the only sector which shrank in Q4 within the GDP reading. This comes despite the booming housing market and perhaps points to weaknesses in policy with respect to building new construction projects. That being said, the construction PMI has been the best performing over recent months and thus one should not be too dismissive. It will be key to note whether we can see a positive push into higher expansion this month, despite a predicted fall to 61.6 following last month’s figure of 62.1. However, given the relatively minor impact that this sector has upon growth in the UK, this figure will be third in line in terms of emphasis for me.

Wednesday brings the most important of the three, with the services PMI providing a leading indication of what direction the UK’s most important sector is moving in January. As mentioned, the services sector is absolutely key to whether the UK economy is growing or not and thus the ability to see ahead of time in what direction the sector appears to be progressing is invaluable. Market forecasters point towards a potential rise back to 59.1 from 58.8 last month. Ultimately, any rise in this figure would be positive for the economy as it would point towards a move back in the right direction for not only the sector, but most importantly the wider economy.

Finally, on Thursday the monetary policy committee at the BoE will announce their latest interest rate and asset purchase policy decisions. As with previous months, there is little likeliness of any change in either the interest rate or asset purchase facility given that Mark Carney’s forward guidance policy seeks to provide a stable environment. Add to this the fact that the economy has been performing particularly well in recent months and there is no appetite for further changes.

Thus as with previous months it is worth looking out for any change in the statement, most notably in relation to the forward guidance policy which is coming under increased pressure now that we approach the key 7.0% threshold much earlier than expected. Recent statements from Carney at the World Economic Forum cited a willingness to update the forward guidance policy to encompass different tools. Whilst this is unlikely to have been finalised quite yet, I am looking for further clues as to how this might take shape.

Eurozone

A similar week ahead for the eurozone, where the release of various PMI figures, along with the latest ECB meetings will dominate proceedings. The PMI releases are split across two days, with the manufacturing figures due on Monday, whilst Wednesday will be focused upon the services sectors. As mentioned previously, the key numbers to be watching out for are the German and eurozone figures primarily. However, it is also worth noting that those weaker areas such as French manufacturing are going to be key as we need to see a move closer towards expansion to bring a sense of calm. Currently, with a figure of 47.0 in play, economists and analysts can plainly see an uncomfortably deteriorating sector in the second largest eurozone economy. Also watch out for the eurozone composite PMI, which takes into account all areas of the single currency and gives a more all encompassing figure.

The biggest event of the week arrives on Thursday, when the ECB announce their latest decision with regards to monetary policy. This would not be as much of a major event had it not been for the latest inflation figure out of the eurozone, which saw CPI fall back to 0.7%. The last time we saw an inflation rate of 0.7%, Mario Draghi decided to pull back interest rates, cutting the minimum bid rate by 25 basis points. However, given that the impact of that rate cut upon CPI was almost non-existent, there are significant doubts as to whether Draghi will employ the same type of tactic. Thus whilst I do not expect a rate cut, this meeting will be significantly more interesting for the fact that Draghi has to address this threat of deflation in some way. Thus look out for both the headline rate and failing that, an indication of what alternate could be utilised.

Asia & Oceania

A somewhat quiet week in Asia, in part due to the fact that China will be celebrating the spring festival following the Chinese new year. That being said, there is the release of the manufacturing PMI to address, which is due out over the weekend. Much has been made of the Chinese data recently for a number of reasons, not least the emerging markets sell-off seen over the last week. This was initiated from a disappointing HSBC manufacturing PMI figure, which saw the sector shift back into contraction. The emerging markets were the ones to suffer the most from the market jitters seen in response to this figure, however it has been felt around the work in the form of heightened risk aversion.

The official manufacturing PMI figure typically performs better than the HSBC reading for a number of reasons. Firstly, the official figure is geared towards the larger, state backed firms, which will of course fare better during the weaker times of growth for the economy in comparison to smaller firms. Also, the HSBC figure is an independent measure and thus there is little political will to alter how the industry is portrayed to the world. Following the admission that trade figures have been manipulated by bogus invoicing, it is understandable that analysts treat official data out of China with a degree of skepticism. Thus there is a greater degree of trust associated with the HSBC nowadays as a true measure.

That being said, the official manufacturing PMI figure remains the main measure of the manufacturing sector for the worlds second largest economy. Following the HSBC figure falling into contraction, this release is going to be absolutely key and should it also fall back below 50, this could spark a significant sell-off globally. Estimates point towards a pull back to 50.5 from 51.0 last month. Given the proximity of this to the key 50.0 mark, it is well worth looking out for this release.

Finally in Australia, a busy week is dominated by the RBA monetary policy statement which sees governor Glenn Stevens take the stand once more in what is likely to be a somewhat less showstopping meeting than usual. One of the key drivers behind the dovish rhetoric from Stevens has been the need to drive the AUD rate lower. However, with the Aussie continuing to fall, signs point towards things going the right way for the RBA. That being said, not long ago he explicitly mentioned a target of 0.85 for the AUDUSD pair, and with the level currently at 0.875 there is still some way to go. Thus I would say that it is unlikely we are going to see a reduction in the interest rate this month, yet the accompanying statement will still be crucially important to how markets perceive this event.

Author: Joshua Mahony

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