The market got an extra dose of “misunderstandings”. While a number of interest rate increases by the key Central banks are expected, the inflation, necessary to stimulate consumer expenditures, is still chilling out in the shadow of a hot summer. So, NZD and GBP experienced special shocks, their data turned out to be worse than forecasts. The dollar remained in the shadow of politics, and the biggest volatility was brought to the market by Mario Draghi. Don’t wait for tightening from the ECB until late autumn.
On the night of Monday to Tuesday, NZDUSD dropped 60 points. The reason for this was the publication of the quarterly inflation report, which indicated a weakening of the indicator, and, most importantly, it turned out to be below the forecasts of the Reserve Bank of New Zealand.
NZCPI [q/q] fact 0.0% against the forecast of 0.2%
NZ CPI [y/y] 1.7% against 1.9% and 2.2% of the previous indicator
This situation immediately (and negatively) affected the market's expectation in terms of the interest rate increase by the Reserve Bank of New Zealand. If the actions of the neighbor in the form of the Reserve Bank of Australia and the weakness of the dollar didn’t happen to be, we would see a much longer reaction to this negativity for NZD.
On Tuesday, the minutes of the meeting of the Reserve Bank of Australia (held two weeks ago) were published. In these minutes, the RBA discussed the interest rate level: “the rate remains neutral but it would be great to see it higher, the rest of the Central Banks follow a tightening scenario, and we are pursuing a soft policy for about five years and also closely monitor the growth of consumer expenditures”.
Then, on Thursday, the labor market data were published, they turned out to be neutral, but the market took them in the first few minutes on the principle “there is no negative, so it means good” and AUDUSD somewhat strengthened in the initial stage after the release but it quickly retreated for half an hour.
AU Participation Rate 65% (0.09%) against the forecast of 64.9% and the previous 64.9%
AU Unemployment Rates.a. 5.6% against the forecast of 5.6%, the previous 5.5%
AU Employment Change s.a. fact 14 (-1), forecast 15, previous 42
Against this background, AUD has grown. Apparently, the RBA did not like this situation very much, and on Friday the deputy head of the bank clarified: “It is too early to draw conclusions based on our neutral beliefs regarding the rate and this should not cause the formation of opinions in relation to its size. We do not follow the general trend of tightening the monetary policy of the rest of the Central Banks.”
Nevertheless, it is necessary to prepare for the actions of the RBA in the near future since the very existence of such conversations is already a signal to be attentive.
On Tuesday, fresh Reuters’ polls were published, according to which the US Federal Reserve will increase the rate in the fourth quarter of this year and will also go the length of the additional rate increase in the first quarter of 2018.
Based on the CME Group data, futures contracts remain on their own - a 50% chance of another rate increase in December (although earlier the chance was 55%).
The dollar remained (and remains) under political pressure. There were especially bright events such as the information from Bloomberg according to which the special committee considers the Trump deals, according to which the Russian oligarch acquired the property owned by Trump, as well as the circumstances of the Miss Universe contest, which made Trump “particularly close to Russia.” This fire flared up even more when the markets learned about the second meeting of Trump-Putin: as it turned out, the presidents met twice at the G20 summit, while the press “saw” only one meeting. In addition, the meeting turned out to be “unofficial” and lasted an hour with only one interpreter. It is interesting that he was Russian, and anyone, except the Russian side, doesn’t have information about the conversation.
Reuters also published its data for the Bank of England's expected actions: there is only a 30% chance of the rate increase this year. Problems can cause a weak increase of GDP (by the way, new data will be published on Wednesday) as well as an unconvincing increase in household incomes.
The consumer price index, published on Tuesday, is far below forecasts and cut the pound down for the whole pattern.
UKCPI [y/y]2.6% (-0.3%) against the forecast of 2.9%
And even Mark Carney's comment that the lower inflation corresponds to the regulator's forecast could not stop the drop of GBPUSD
Brexit's discussions are continuing in the political arena, the sides are completing the second round of negotiations. It is inherent to this process - you should not expect the quick final decision, but there is some progress: Britain remains loyal with regard to the rights of EU citizens in the territory of the UK.
Retail sales based on the results of the report published on Thursday remain in the positive zone: Retail Sales m/m by fact 0.6% at the forecast of 0.4% and the previous value of -1.1%
The ECB raised the European currency really well as a result of information received after the Bank’s meeting on Thursday. As a result of the difficulties with the rising inflation to the target level of the regulator, Draghi is not yet ready to discuss specific time frame for dismantling the QE incentive program. The markets did not hear what they wanted.
Draghi is still optimistic about the outlook for the euro zone's economic growth, but a substantial monetary stimulus, by his opinion, is still necessary for strengthening the underlying inflationary pressure.
Probably, the issue of tightening the policy is postponed until late autumn.
The Canadian currency was waiting for Friday and on that day it received a substantial data package:
As a matter of principle, this package can be considered as positive but still, it looks more neutral. For example, the annual inflation data somewhat confuse. Probably, more impressive figures are needed for the Bank of Canada's substantial decision to raise the interest rate.
Important events of the upcoming week
Much will be decided in the upcoming week! Be extremely attentive.
Is the market doubtful of the actions of the Reserve Bank of Australia? No problem! On Wednesday, quarterly inflation data (AU CPI) will be published after which the chance for the rate increase by the RBA will be clearer.
Does Mark Carney worry about weak GDP? Okay! On Wednesday, fresh GDP growth data for the second quarter (UK GDP) will be published, volatility is attached.
Do you want more clarifications from the FOMC? So wait for the same Wednesday and there will be Fed’s meeting in the evening (US Fed Interest Rate Decision).
Oops, and on Friday, the quarterly USA’s GDP and the monthly Canada's GDP will be published simultaneously - CA GDP + US GDP Annualized
A full calendar of upcoming trading events that you can use for algorithmic trading can be found on the trading signals