Monday, 01 December 2008 19:22:57 GMT
The euro and British pound face heavy event risk this week as the European Central Bank (ECB) and Bank of England (BOE) are both anticipated to slash interest rates. However, other central bank decisions loom as well, including from the Reserve Bank of Australia (RBA) tonight, while Friday’s US non-farm payrolls (NFPs) are bound to capture the attention of US dollar traders.
• Reserve Bank of Australian Rate Decision – December 1
The Reserve Bank of Australia is anticipated to cut rates for the fourth time in as many months at 22:30 ET on Monday, with a Bloomberg News poll of economists calling for a 75 basis point reduction to a more than 6-year low of 4.50 percent. However, there is some potential for an even more aggressive move, as Credit Suisse overnight index swaps are pricing in at least a 100 basis point cut, which would bring the RBA's cash rate target to the lowest since December 2001. Such a move would likely weigh on the Australian dollar heavily. Overall, Australia is facing major headwinds from financial market instability, which has led to tighter credit conditions, as well as from both domestic and foreign demand. Indeed, global slowdown is hurting exports, something the Australian economy depends on for employment and broad growth. The situation has not been helped by significantly lower commodity prices, though it has served to cool inflation pressures, which leaves the RBA additional leeway to make monetary policy more accommodative in coming months.
• Reserve Bank of New Zealand Rate Decision – December 3
The Reserve Bank of New Zealand has cut rates during their past three meetings, each more aggressive than the last, and the same is expected for the RBNZ’s next rate announcement on Wednesday at 15:00 ET. Indeed, a Bloomberg News poll shows that economists anticipate that the central bank will slash rates by a whopping 150 basis points to a 5-year low of 5.00 percent. Unlike with the RBA, Credit Suisse overnight index swaps are pricing in a less aggressive 125 basis point reduction. Following the bank’s last rate decision, RBNZ Governor Alan Bollard suggested that future rate cuts would depend on data confirmation of easing inflation pressures and “how the global financial developments play out.” Thus far, economic data in New Zealand has signaled cooling price growth, as the RBNZ’s 2-year inflation expectation survey fell to 2.7 percent from 3.0 percent in Q4 and food prices fell negative for the first time in 14-months during October. Meanwhile, financial market conditions have only deteriorated, leaving the odds in favor of a sharp rate cut by the RBNZ that could trigger declines in the New Zealand dollar on Wednesday.
• Bank of England Rate Decision – December 4
The British pound could pull back even further this week as Bloomberg News is forecasting that the Bank of England will cut rates by 100 basis points at 7:00 ET on Thursday, while Credit Suisse overnight index swaps are fully pricing in a 75 basis point reduction. This is indeed within the realm of possibilities since the UK has tipped into recession and the BOE, and UK government, anticipate that things will only get worse. In fact, monetary policy action will be just one of many efforts put forth in an attempt to prevent the UK economy from falling into a prolonged recession, as Chancellor of the Exchequer Alistair Darling downgraded growth forecasts during his pre-budget report on November 24 to 0.75 percent in 2008, between -0.75 and -1.25 percent in 2009, and between 1.5 to 2 percent in 2010. Chancellor Darling also announced a £20 billion fiscal stimulus plan, which calls for a cut to the Value Added Tax (VAT) to 15 percent from 17.5 percent, boosts to state pensions and child benefits, extensions of employment support, and a housing support package, among other things. In order to accommodate for some of these costs, Chancellor Darling said that after April 2011 those earning at least £150,000 a year would face an income tax of 45 percent.
• European Central Bank Rate Decision – December 4
A record drop in Euro-zone CPI and rising unemployment leaves the odds in favor of rate cut by the European Central Bank on Thursday at 7:45 ET. In fact, Credit Suisse overnight index swaps are now fully pricing in a 50 basis point reduction by the ECB, and a 40 percent chance of an even more aggressive 75 basis point cut. Meanwhile, a Bloomberg News poll shows that economists expect the former. This easily leaves the decision as one of the most important pieces of event risk this week, but traders will also have to look out for comments by ECB President Jean-Claude Trichet during his post-meeting press conference. Mr. Trichet is one of the most opinionated central bank chiefs around, and suggestions that recession will last longer than previously expected in the Euro-zone has the potential to lead the euro far lower.
• NFP Day in Canada and the US – December 5
The US dollar isn’t the only currency facing key employment data on Friday, as the Canadian dollar tends to react strongly to the Canadian net employment change, which is scheduled to be released at 7:00 ET. According to Bloomberg News, the Canadian economy is forecasted to have lost 20,000 workers during November, which may push the unemployment rate up to a 2-year high of 6.4 percent. A reading in line with or worse than forecasts could lead the Canadian dollar to pull back sharply, but traders should beware that the currency’s reaction tends to be short lived. At 8:30 ET, US non-farm payrolls are sure to garner significant attention as they are forecasted to fall negative for the 11th straight month and by the most since September 2001. Furthermore, the unemployment rate is anticipated to rise to 6.8 percent - the highest since August 1993 - from already lofty levels of 6.5 percent.
See the DailyFX Calendar for a full list, timetable, and consensus forecasts for upcoming economic indicators.
Written by Terri Belkas, Currency Strategist of DailyFX.com
Send questions or comments to tbelkas@dailyfx.com
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