Trading Week Outlook: October 3 - 7, 2011

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Includes: AUNZ, CYB, DIA, FXA, FXB, FXC, FXE, FXF, FXY, QQQ, SPY, UDN, UUP
by: All Things Forex

The first trading week of October and of the fourth quarter will kick-start the market’s quest to find out if the U.S. economy is really as bad as the Fed’s gloomy outlook painted it to be. Next week’s Non-Farm Payrolls would provide the first clues, while the Euro-zone debt crisis continues to fuel investors’ concerns that the worst is yet to come.

In preparation for the new trading week, here is the outlook for the Top 10 spotlight economic events that will move the markets around the globe.

1. USD- U.S. ISM Manufacturing Index, a leading indicator of industrial activity, where a reading above or below 50 is the dividing line between economic expansion and contraction, Mon., Oct. 3, 10:00 am, ET.

The U.S. manufacturing sector index is forecast to maintain above 50 for another month with a reading of 50.5 in September from 50.6 in August, but a move into contraction territory would quickly join the long list of signs of U.S. economic weakness.

2. AUD- Reserve Bank of Australia Interest Rate Announcement, Mon., Oct. 3, 11:30 pm, ET.

Last month’s monetary policy decisions from all major central banks have made it clear that they are steering further away from tightening in an effort to stimulate growth. The Reserve Bank of Australia is not likely to differ from that course and should keep rates at the current 4.75% level, while expressing a cautious view on domestic and global economic conditions. Even the slightest hint of a rate cut, coupled with risk aversion and weakness in commodity prices, could provide further impetus to the Australian dollar’s recent decline.

3. GBP- U.K. GDP- Gross Domestic Product, the main measure of economic activity and growth, Wed., Oct. 5, 4:30 am, ET.

The final reading of the U.K. Q2 GDP should confirm that the U.K. economy grew by only 0.2% q/q in the second quarter of 2011 after the 0.5% q/q increase in Q1 2011. An upward revision could give the British pound a temporary boost, but with the Bank of England policy makers warming up to the idea of more quantitative easing and expansion of the Asset Purchase Program, the pound could continue to feel the pressure.

4. EUR- Euro-zone GDP- Gross Domestic Product, the main measure of economic activity and growth, Wed., Oct. 5, 5:00 am, ET.

The slowdown in the Euro-zone’s economy is not much of a newsflash and the final reading of the Euro-zone Q2 GDP should confirm that the economy grew by only 0.2% q/q in the second quarter of 2011 after the 0.8% q/q increase in Q1 2011.

5. USD- U.S. ADP-Automatic Data Processing Employment Report, a measure of jobs lost or added to the private sector of the economy, also serving as a leading indicator for the outcome of the monthly non-farm payrolls, Wed., Oct. 5, 8:15 am, ET.

Private sector payrolls are forecast to see a smaller increase by up to 80K in September, following the 91K new jobs created in August. An even lower than expected number could add to the market’s growing concerns about the state of the U.S. job market ahead of Friday’s Non-Farm Payrolls report.

6. USD- U.S. ISM Non-Manufacturing Index, a leading indicator of economic conditions in the services industries: agriculture, mining, construction, transportation, communications, wholesale trade and retail trade, Wed., Oct. 5, 10:00 am, ET.

The U.S. services industry activity is forecast to expand for another month, although at a slower pace to 54.9 in September from 55.6 in August.

7. GBP- Bank of England Interest Rate Announcement, Thurs., Oct. 6, 7:00 am, ET.

With more Bank of England policy makers and the Chancellor of the Exchequer warming up to the idea of additional quantitative easing, the pound could continue to feel the pressure ahead of the Bank of England’s October meeting. We are likely to see another unanimous vote by the Monetary Policy Committee to keep the benchmark rate at the low 0.50%. The GBP longs might rush to the exits if the Bank of England announces an expansion of its Asset Purchase Program beyond the current 200 billon-pounds ceiling.

8. EUR- European Central Bank Interest Rate Announcement, Thurs., Oct. 6, 7:45 am, ET.

As expected, due to the slowdown in the Euro-zone economy and with inflationary pressures flattening throughout the summer months, the market is pricing a rate cut by the European Central Bank. Such announcement could come as early as the next meeting on October 6, although there are some “whispers” that the ECB will probably cut rates in November, after President Trichet retires on October 31. Fighting inflation and maintaining price stability is Mr. Trichet’s legacy and with last Friday’s unexpected spike in consumer prices from 2.5% y/y in July and August to 3.0% y/y in September, the odds for a rate cut in October have somewhat diminished. Whether it comes this month or in November, expectations of an impeding rate cut and the Euro-zone debt crisis will continue to be major risk factors for the EUR.

9. JPY- Bank of Japan Interest Rate Announcement, Fri., Oct. 7, around 12:00 am, ET.

Although the U.S. dollar has managed to stay above record lows, many other currency majors have already broken lower against the yen. With the currency’s strength likely to continue as a result of risk aversion and the flight to safety, the Bank of Japan might be forced to take further measures to curb the yen’s gains. After the Ministry of Finance beefed up it’s intervention fund by another 15 trillion yen last week, the Bank of Japan could follow suit by keeping the benchmark rate in the record low target band between 0%-0.10% and might decide to expand its ultra-accommodative monetary policy, while “carefully watching” the “one-sided moves” of the yen.

10. USD- U.S. Non-Farm Payrolls and Employment Situation Report, one of the most important indicators of economic health, measuring the number of new jobs created or lost in the world’s largest economy, Fri., Oct. 7, 8:30 am, ET.

After a sequence of dismal summer labor market reports, traders will delve into all economic data throughout the month of October for signs of strength or weakness ahead of the Fed’s next meeting on November 1-2. The U.S. Non-Farm Payrolls might instill some cautious optimism with consensus forecasts expecting the U.S. economy to add up to 80K jobs in September- a much better reading than the non-existent, zero job creation in August. The unemployment rate would likely remain at 9.1% as a reminder that the road to recovery will be a long one. Another weak employment report would reinforce the Fed’s gloomy outlook on the economy and could re-open the door to QE3.