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Currency Outlook: Ecofin meeting and CPI releases

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Despite a late start to the week for Thanksgiving and Columbus day, expect a strong performance by the Canadian and US Dollars
Alberto M.


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The third week of October starts with the end of the IMF meeting and many markets closed because of Columbus Day and Thanksgiving holidays. However, the incoming week will be an extremely intense and interesting week for the FX space.

Last week main market mover was the FOMC minute releases, which had a negative impact on USD. The minutes revealed that the members of the Fed had some doubts on the rates decision. Nevertheless, the greenback is still the currency of choice for investors. The main uncertainty nowadays is when rates will be raised in UK and USA, since this will be the biggest market mover in the following months. However, neither the Fed nor the BoE have been really informative with regards to the decision.

The major authorities of both the Euro and the Dollar, the president of the European Central Bank, Mario Draghi, and the Chair of the Federal Reserve, Janet Ellen, give speeches this week, and may give some additional hint on the rates decision.

The main releases for the week are the Consumer Price Indexes of the European countries and the Retail Sales and PPI of USA. The CPI releases will serve as a guide to investors to assess how the main economies of the world have been behaving lately, and what are the inflation levels.

With regards to sentiment analysis, both the ZEW Economic Sentiment and the Reuters/Michigan Consumer Sentiment Index are the major publications this week.

USD Outlook:

The growth estimates from the International Monetary Fund, the OCDE and the World Bank show that United States and Great Britain lead the economic recovery, while Europe and Japan are getting behind. However, the FOMC minutes release last week has a negative impact on the value of the USD. The minutes revealed that although a raise in interest rates is coming, it will take a bit more than expected.

This week, which starts on Tuesday because it is bank holiday in Monday (Columbus Day) has as major event is the Retail Sales release. The FX space will be paying close attention to this indicator, because it may have a really positive impact on the USD. The Producer Price Indexes are released on Tuesday too, and the forecasts are also positive for this indicator of the inflation. Another important reading to be considered the week ahead are the Jobless Claims.

On Friday, both the Reuters/Michigan University Consumer Sentiment Index, which is a major indicator of the confidence of personal consumer on the economic activity, and the House Starts data, which serves to gauge the activity in the housing sector, are the main events. In addition, Fed’s Chair Janet Yellen gives a speech on the same day, which may increase the volatility of the markets.

The greenback is attractive for investors, and is the best currency both as a safe haven as a speculative currency. The forecasts show a promising good week for the USD.

EUR Outlook:

The concern on the economic situation of the Euro-zone increased last week due to the significant drop in factory orders and industrial output in Germany, caused by the dispute between Europe and Russia with regards of Ukraine.

Two weeks after the European Central Bank Monetary Policy Making Meeting, Mario Draghi will give several speeches along this week at different events. The speeches will likely reveal some clue on the future decisions on rates and the hypothetical additional unconventional measures the ECB may take in the near future.

The Economic and Financial Affairs Council (Ecofin) meeting takes place this Tuesday. Although Germany’s economy has showed some significant slowdown in the last month, Germany is favorable to keep the economic discipline, which is not what most of the countries in European Monetary Union need. This tension will be one of the hot topics of debate between the economy and finance ministers of the 28 countries of the EMU.

From a quantitative viewpoint, Consumer Price Indexes releases of the German and French economies, which are the bigger economies in Europe, and the aggregated Euro-zone CPI, may be considered the market movers for this week, together with the Trade Balance, which has presented relatively good results lately. The trade surplus of the monetary union is one of the main backbones of its economy, and although it has suffered from the economic sanctions derived from the Ukraine crisis, August trade balance is expected to throw positive results. Another important data to be made public this week is the Industrial Production. This indicator, released by the Eurostat, shows the volume of production of industries, and is a good indicator to gauge incoming inflation.

The German ZEW Economics Sentiment will also reveal the confidence deposited by investors on Germany and the whole Euro-Zone. 6.9 and 14.2 are the expected figures for Germany and Europe respectively.

The situation is not good for Europe, and the measures taken by the ECB have not started to have a positive impact on the recovery of EUR. Moreover, Germany is likely to have entered into recession, which may bring the whole Euro-zone recovery to a halt. For this reasons, the outlook is negative for EUR. This will be a mediocre week for the European currency.

GBP Outlook:

The Monetary Policy Making meeting by the Bank of England last week did not brought any new on the rates hike, although the good shape of the British economy makes it plausible to have a raise on rates by the end of 2014 as BoE Governor Mark Carney suggested a few months ago.

A few key economic indicators on United Kingdom economy are released this week, which are going to have an impact on the foreign exchange market. The week starts on Monday with the British Retail Consortium (BRC) Retail Sales monitor, which serves to gauge the changes in the retail sales. However, the most important day for GBP this week is Tuesday, when both the Core Consumer Price Index (Core CPI) and the Consumer Price Index (CPI) are released. In addition to these two key indicators of the inflation, the Producer Price Index and the Retail Price Index are released on Tuesday.

On Wednesday, the Claimant Count Change, which is the unemployment indicator of the National Statistics, is presented. The other inflation indicator revealed this day is the Average Earnings, which measures the salaries of the labor force of UK.

The forecasts for all these readings range from steady to positive, what makes plausible that this will be a good week for the GBP.

JPY Outlook:

The cut on the perspectives of growth of Japan by the International Monetary Fund has been a huge blow on the value of the Japanese Yen compared with the USD. The cut on the forecast for Japan growth is the biggest among the G10 countries. This cut is a faithful indicator of the state of the Japanese economy; it is growing way slower than what Japanese monetary policy makers would like.

After an uneventful meeting of the Bank of Japan last week, the week ahead is not going to be more exciting. There are just a few of events, and none of them is a huge market mover. On Tuesday, the BoJ releases its semiannual Outlook Report.

On Wednesday, the Industrial Production indicator, which serves to measure the output of factories and mines from Japan, is published. The forecast is that it will present a contraction with respect to the previous reading. Finally, on Thursday, the Foreign bond investment and Foreign investment in Japan stocks will serve to assess the confidence of investors on the Japanese economy.

Overall, this will be a calm week for JPY, and its relative strength will be dictated by what USD does this week. Our forecast is that this will be a mediocre week for JPY.

CAD Outlook:

Canada employment readings last week were great, and the Canadian currency skyrocketed and the doubts on USD caused by the FOMC made the USD/CAD currency pair to decrease.

This week the most important events are the releases of both the Core Consumer Price Index (Core CPI) and the Consumer Price Index (CPI) on Friday. Both indicators are the primary way to gauge inflation of an economy. The main difference between them is that Core CPI does not include in the basket the more volatile CPI items, what makes Core CPI a more stable indicator to measure inflation.

Slightly less important, on Thursday the foreign securities purchases and the manufacturing sales data are released. This is a short week for Canada’s economy because Monday is Thanksgiving Day, but nevertheless, this is going to be a good week for CAD.

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