Week ahead: Preliminary October PMI figures in sight

In the coming week the calendar seems to be getting lighter. On the monetary front we note the release from China of PBoC’s interest rate decision on Monday’s Asian session, while the highlight is expected to be from Canada, BoC’s interest rate decision on Wednesday. As for financial releases, we start on Tuesday as we get New Zealand’s trade data and Canada’s PPI rates for September and on Wednesday Eurozone’s preliminary consumer confidence for October. The heat turns on, on Thursday as we get the preliminary releases of the October PMIs for Australia, Japan, France, Germany, the Eurozone as a whole, the UK and the US, as well as France’s business climate for October and the US weekly initial jobless claims figure. On Friday we get from Japan Tokyo’s CPI rates for October, Germany’s Ifo indicators for the same month, the US durable goods orders for September and the final October University of Michigan consumer sentiment as well as Canada’s retail sales for August. 

USD – Fundamentals to lead

The main factor behind USD’s movement in the past week may have been the Fed’s monetary policy. Fed policymakers continued to cast doubt on the market’s expectations for two more rate cuts by the bank by the end of the year, thus supporting the USD.

On a macro-economic level, the drop of the initial jobless claims figure, the beyond market expectations acceleration of the retail sales for the past month and the rise of the Philly Fed Business index for October were positive signals for the US economy. On the other hand, the wider than expected contraction of the industrial output rate tended to signal slowing economic activity in the sector. So some worries for the industrial sector remain.  

On a fundamental level, the uncertainty of the US elections seems to maintain market worries for the outcome and we note the US Government’s intentions for further export limitations of microchips as another step in the US-Sino trade wars. Both elements may be providing safe haven inflows for the greenback.

Analyst’s opinion (USD)

“We continue to see the Fed’s intentions as the main factor behind USD’s direction in the coming week and should Fed policymakers continue to express less dovish views than the market’s expectations we may see the USD continue to gain, yet at some point the market may price in the comment stated. Furthermore, given the low number of high impact financial releases in the coming week from the US, we may see the role of monetary policy and fundamentals being further enhanced in leading the USD.”

GBP – UK inflation eases beyond expectations

Economic data shook the pound in the past few days. UK employment data for August showed a tighter employment market than anticipated, the retail sales growth rate for the same month slowed down less than expected, yet the main release may have been the UK CPI rates for September that slowed down beyond expectations reaching levels below BoE’s 2% target on a headline level. In a similar mood, also the PPI rates for the month contracted all aligning towards underscoring the easing of inflationary pressures in the UK.

It’s understandable that the slower CPI rates could enhance the dovish expectations of the market for BoE’s intentions. BoE’s Governor Bailey’s comment for a more aggressive rate cutting path seems to find a strong footing and its understandable that the market increasingly prices in two rate cuts by the bank until the end of the year.

On a fundamental level, we note the hard rains hitting the UK in past few days, disrupting travelling, closing schools and putting the UK national insurance to the test. Furthermore we note the protest for the Government decision to cut winter fuel subsidies.  

Analyst’s opinion (GBP)

 

“We see the case for GBP’s weakening in the coming week to continue should BoE policymakers verify the market’s dovish expectations, while on a macroeconomic level, pound traders may focus on the release of the preliminary PMI figures for October on Thursday. Fundamentals may gain some traction yet for the time being seem to be subdued and have lessening importance.” 

JPY – Hawkishness of BoJ eases?

Monetary-policy-wise, we tend to see a slight shift of BoJ’s stance. It’s characteristic that BoJ policymaker Adachi stated that the bank should continue on the rate hiking path on a “very moderated” pace. The bank’s efforts to normalise its monetary policy is facing increased headwinds also on a political level.

On a fundamental level, JPY’s dual nature may come once again under the spotlight, especially given the tensions between South and North Korea. Also tensions at the Taiwan straits may increase its importance in the international markets and getting some support.

On a macroeconomic level we note the slowdown of September’s CPI rates and turn our attention towards the release of Japan’s preliminary PMI figures next Thursday in an indication of economic activity for October. Further and deeper contraction of economic activity in the manufacturing sector may weigh on the JPY while on Friday’s Asian session we get a fresher view on inflation in the wider Tokyo area for October.     

Analyst’s opinion (JPY)

“JPY’s direction seems to be in the balance. On the one hand, further indications of BoJ delaying its monetary policy normalisation could weigh on the JPY. Hence we highlight BoJ Governor Ueda’s speech for more clues about the bank’s intentions. On the fundamental side we expect any major escalation in the prementioned conflicts to provide safe haven inflows for the JPY, yet the actual escalation remains highly uncertain. ” 

EUR – Preliminary October PMI figures in focus

On a monetary policy level the ECB delivered the much awaited rate cut yesterday. In the accompanying statement, the bank mentioned that it remains data driven, yet ECB President Lagarde in her press conference allowed for the scenario of another rate cut until the end of the year. Overall we see the case for the ECB to maintain a dovish stance in the coming week, A number of ECB policymakers are scheduled to speak next week, yet the speech of ECB President Lagarde’s at the Atlantic Council next Wednesday about Europe’s economic outlook seems to stand out and may affect EUR traders stance.  

As for financial releases we highlight the preliminary PMI figures for August next Thursday. We intend to focus on France’s services PMI figure Germany’s manufacturing sector and for a rounder view Eurozone’s composite PMI figure. Please note that the September data showed a wide contraction of economic activity in Germany’s manufacturing sector dragging all the area lower, thus painting a rather gloomy picture for the area’s economic outlook. We also intend to keep an eye out for Germany’s October Ifo indicators.

On a fundamental level, the sentiment about the Eurozone and Germany in particular seems to be darker by the day. There seems to be no light at he end of the tunnel nor any solutions seem to surface by European politicians. The political climate is tense and the threat of a populist, far right shift is present if not growing. Furthermore, the ongoing war in Ukraine and the possible repercussions of the EU imposing sanctions on Chinese EV’s do not come the EUR’s aid.    

Analyst’s opinion (EUR)

“The common currency seems to be about to end the week in the reds across the board in the FX market and it may prove to be a hard case to be made for EUR bulls. Overall we see the case for ECB’s stance to continue to weigh on the common currency. One small exception that could provide some support for the EUR would be an improvement, possibly better than expected PMI figures, despite some remaining below the reading of 50. ” 

AUD – Developments in China to affect the Aussie

On a macroeconomic level may be the most important release in the past few days for the Aussie was Australia’s employment data for September. The data aligned towards pointing a tighter employment market in Australia, with the unemployment rate unexpectedly ticking down and the employment change figure rising to 64.1k. In the coming week we see no major financial data releases in the calendar, maybe with the exception of the October’s preliminary PMI figures. Other than that we expect fundamentals to lead the Aussie in the coming week.  

On a monetary level the tightening of the Australian employment market tended to enhance the market’s expectations for RBA to remain on hold for the rest of the year. Furthermore RBA Assistant Governor Hunter stated that inflation proved stickier than anticipated. We expect RBA policymakers in the coming week to maintain a hawkish stance.  

The fundamentals issues revolving around the Aussie cannot escape developments in China, given the close Sino Australian economic ties. China’s September deflationary data, trade data, industrial output, retail sales and Q3 GDP rate highlighted the issues surrounding the recovery of the Chinese economy The release of the Q3 GDP rate highlighted the distance of economic reality with the Chinese government’s target of a 5%yoy GDP rate. Calls for a wider stimulus by the Chinese Government and its central bank tended to gain further traction and uncertainty may have been enhanced. There is still a positive aspect in the release as the market may have been expecting a wider slowdown of the GDP rate. Furthermore, we note that the retail sales growth rate for September accelerated, in a positive signal for the internal demand side of the Chinese economy, as did the industrial output growth rate in a signal of increased economic activity in the sector. Finally, the Urban investment growth rate failed to slow down, in a sign of how the construction sector in China despite its problems, hasn’t given up. We turn our attention to Monday’s Asian session, as we get from China, PBoC’s interest rate decision. The big question mark is whether the bank will give into markets’ pressure and lower interest rates with special highlight being set on the loan 1-year and loan 5-year rates or not. A possible easing of the bank’s monetary policy could weigh on the Yuan somewhat, yet at the same time may improve the market sentiment and support riskier assets such as equities and commodity currencies such as the AUD.       

Analyst’s opinion (AUD)

“On a monetary policy level we tend to view the Aussie as being well supported by RBA’s stance, yet the issues surrounding the Chinese economic recovery tend to outweigh it and should they be enhanced in the coming week, we may see the Aussie slipping. ” 

CAD – BoC’s interest rate decision in focus

The main factor affecting the Loonie in the past few days may have been the release of Canada’s CPI rates for September. The release underscored the further easing of inflationary pressures beyond market expectations on a headline level. In the coming week, we may see CAD traders turning their attention on the release of Canada’s September PPI rates and August retail sales, yet both events may be overshadowed by the release of BOC’s interest rate decision, next Wednesday.

Hence monetary policy is expected to be the main driver in the coming week for the CAD. The bank is expected to deliver a 50 basis points rate cut and the market prices in more rate cuts to come. Hence any failure of the bank to deliver the double rate cut and signal that more are to come may support the Loonie as it could contradict market expectations and may force the market to reposition itself.

On a fundamental level, we note the path of oil prices as an issue for the CAD given the perception of a positive correlation of the Loonie with oil prices. Any weakening of oil prices could weigh on the Loonie, while should oil prices start rising again, we may see the CAD getting some support.        

Analyst’s opinion (CAD)

“Overall, the CAD’s weakening is expected to be maintained at least against the USD, under the hypothesis that the above assumptions hold water. Nevertheless we cannot stress enough for Loonie traders the predominance of BoC’s monetary policy intentions, over financial data and fundamentals, as to be expressed in its meeting next Wednesday. ”