This is a tough week on the news front, with data coming fast and furious before peaking with the release of the “granddaddy of reports,” U.S. non-farm payroll headlines on Friday. However, well before then, a plethora of central bank rate announcement pooled with a couple of key periphery debt auctions will get to gauge the risk appetite of investors and dominate most of the price movement in all asset classes.
The ECB is expected to remain on hold, however there is a rising risk of a refi-rate cut being priced in. But there are as many who continue to think that a -25bp cut would be much more likely in Q2 than in March. The inconclusive Italian election result has had the euro doves trying to price in a surprise cut as early this Thursday. The futures market is looking at a +30% possibility of this actually occurring. The main line of thinking has euro policy makers telegraphing a cut by preparing money markets with their new growth and inflation forecasts. The problem with this scenario is that last December's forecasts were already dovish in their own right and changes to the forecasts are less likely to be so material. Perhaps policy makers could change tact and prepare to loosen some of the collateral framework to support further credit within the system?
Are the chances of an election in Italy rising? Investors who are worried about the political stalemate are witnessing a rising BTP/bund yield spread and falling Italian equities. This does not make it any easier for other peripheries and weaker euro economies to come to the debt market this week. It certainly will make it more expensive outright to raise capital. The highlight of the auction calendar will be Spain this Thursday. They will get to auction 3- and 5-year bond maturities, while France issues 5-, 10- and 15-year bonds on the same day. While a surprise -25bp refi-rate cut would further undermine front-end yield rate support for the single currency, it will most likely compress peripheral spreads, which could be net supportive for the currency. A dovish only ECB could only be positive for currencies geared to growth in the core of eurozone.
The “Old Lady” has a close call this Thursday. Consensus is swaying towards the Bank of England to keep policy unchanged, but the risk of an increase in asset purchases has risen following the surprisingly weak manufacturing PMI print last week. Last month's MPC minutes showed that three members, outgoing Governor King included, voted for an extension of QE by +£25b. There are a few members sitting on the fence ready to be swayed and perhaps a disappointing services PMI print beforehand on Tuesday may convince the bank into a +GBP25b QE extension? Sterling trades very much under pressure and an increase in AP will only put further downward pressure on the currency as it continues to lose yield support.
The new BoE Governor and outgoing Bank of Canada Governor Carney is expected to leave his homeland policy rate unchanged at +1.00%, very much in line with consensus. The last of the G8 hawks changed their tune in January, turning less hawkish by stating that the “timing of any withdrawal of monetary stimulus has become less imminent than previously anticipated.” Recent U.S. data combined with Canadian Q4 GDP results certainly supports this view. Canadian employment figures this Friday will be the loonies’ litmus test. So far, analysts are anticipating an about turn from January’s dismal negative reading of -21.9k to a positive increase headline print of +8k. The CAD has underperformed of late, mostly in anticipation of a dovish turn by the BoC. Interesting though, the pullbacks have been rather shallow with more and more corporates pulling their buying interest on top for the time being.
Australia policy makers are probably not going to be as exciting. The Reserve Bank of Australia is expected to remain on hold later this evening, very much in line with consensus and market pricing. Governor Stevens is expected to remain in a wait-and-see-mode and continue to observe the impact from the previously delivered easing. The AUD will continue to trade in line with investor risk appetite in the short-term. However, over the long haul, further easing may be necessary to support non-mining sectors of the economy. Australia policy makers are and will remain flexible, an advantage they have over other central banks.
The Bank of Japan's rate announcement should be a non-event in terms of policy innovation, as it marks the last meeting under Governor Shirakawa’s leadership. Neutral observers expect the Diet to approve the Kuroda-Iwata-Nasano BoJ nominations. The market has been positioning itself to win under Abenomics and reflation policy by shorting yen. Therefore, many expect further JPY weakening, on the back of aggressive accommodative policy shifts on both the fiscal and monetary front. The big surprise would be a change to market risk that could increase an appetite for JPY and in turn squeeze the weaker and most vulnerable of JPY shorts.
When it comes to risk appetite, this week’s U.S. data is likely to be generally supportive of it, especially in the aftermath of last week’s Italian elections scare. The street is leaning towards a stronger looking employment report on Friday, a +165k non-farm payrolls print, easing ahead of last month’s +157k reading. Any evidence that U.S. growth is spluttering along would be risk appetite friendly. However, that does not necessarily prove a strong dollar positive.
Staying with the yield theme, in the absence of a yield premium the “big” dollar is unlikely to benefit from improved data. Investors will have to look towards risk proxy currencies for some joy (CAD, NOK and AUD). Ongoing fiscal headwinds from sequestration and from expectations of a U.S. government shutdown are likely to support a weaker dollar trend, and keep U.S. yields under pressure. However, outright against the EUR, technically the dollar looks good. The 30-day lower Bollinger bands are negatively aligned and points south, indicative of the overall direction for spot. Investors seem to be more comfortable selling EUR rallies at the moment, especially so since the single currency is finding it difficult to stride away from the psychological 1.30 area.