FX market volatility is likely to remain high in the coming week as event risk will pick up substantially amidst four major rate decisions. Indeed, the Reserve Bank of Australia, Federal Reserve, Bank of England, and European Central Bank are all expected to make decisions, but only two are expected to make any policy changes.
• Reserve Bank of Australia Rate Decision – November 2, 22:30 ETAccording to Bloomberg News and Credit Suisse overnight index swaps (OIS), the Reserve Bank of Australia (RBA) is likely to raise rates for the second straight month by 25 basis points to 3.50 percent. Looking even further ahead, OIS rates are pricing in 192 basis points worth of hikes over the next 12 months. However, as recently as October 20 - the day before AUDUSD hit its 2009 high of 0.9326 - OIS rates were pricing in 216 basis points worth of increases, but have since gradually faded as speculation that the global economy is in the midst of a broad-based recovery have given way to concerns that signs of growth are just temporary. As a result, the RBA’s rate decision and policy statement could prove critical to the AUDUSD outlook in the near-term. While the RBA did leave the door open to further rate increases in their last statement by saying that “it is now prudent to begin gradually lessening the stimulus provided by monetary policy,” the downward pressures on inflation formed by the sharp appreciation of the Australian dollar may prevent the central bank from tightening policy again right away. If this is the case and the RBA leaves rates unchanged at 3.25 percent, the Australian dollar is likely to plunge on the news. On the other hand, a rate increase in line with forecasts could keep the currency within its uptrend.
• Federal Open Market Committee Rate Decision – November 4, 14:15 ET
At 14:15 ET, the Federal Open Market Committee (FOMC) is widely expected to leave the fed funds target range at 0.0 percent - 0.25 percent, and this should remain the case into early 2010. In fact, the FOMC started saying in January that they continue “to anticipate that economic conditions are likely to warrant exceptionally low levels of the federal funds rate for some time,” and they’ve gone on to repeat this since then. Furthermore, the last statement highlighted that the Committee's policy focus is to support the functioning of financial markets via quantitative easing (QE) and other measures that are likely to keep the size of the Federal Reserve's balance sheet at a high level. Generally, signs that the central bank may increase Treasury purchases have been negative for the US dollar, but indications that they will complete the program within the next month or so could send the greenback spiraling higher.
• Bank of England Rate Decision – November 5, 7:00 ET
The Bank of England (BOE) is anticipated to leave rates unchanged at 0.50 percent on Thursday at 7:00 ET, but this won’t even be the market-moving part of the announcement. Instead, traders will be looking toward the BOE’s policy statement. This has consistently been the prime “news event” of recent rate decisions. Last month, the BOE indicated a neutral stance as they stated they would continue their £175 billion quantitative easing (QE) program, and this ultimately led the British pound to rally against the US dollar and euro immediately. This time around, though, a Bloomberg News poll is calling for the Monetary Policy Committee (MPC) to expand their QE program by £50 billion to £225 billion following the Q3 reading of UK GDP, which showed that the economy remains in recession, and such a reading would have dire consequences for the currency. However, if the BOE allows the program to expire, the British pound is likely to gain.
• European Central Bank Rate Decision – November 5, 7:45 ET
The European Central Bank is anticipated to leave rates unchanged at 1.00 percent at 7:45 ET. Where the currency ends the day, though, may have more to do with what ECB President Jean-Claude Trichet says during his post-meeting press conference at 08:30 ET. Traders will likely focus on any comments regarding the future of interest rates in the region, including whether 1 percent should be considered the “floor,” as well as statements on exit strategies for the central bank’s liquidity programs.
• Canadian, US Employment Report Day – November 6, 7:00 ET and 8:30 ET
At 7:00 ET, the Canadian net employment change for the month of October may rise for the third straight month, this time by 10,000 following an increase of 30,600 in September and 27,100 in August. On the other hand, the unemployment rate is anticipated to have risen to 8.5 percent from 8.4 percent. Since the employment change tends to be a very volatile release, this should have the greater impact on the Canadian dollar, with a surprise drop likely to weigh on the currency and an unexpectedly strong result likely to push it higher.
At 8:30 ET, the US non-farm payroll index (NFP) is forecasted to show job losses for the twenty-second month in October, though the rate of decline is anticipated to slow. At the time of writing, Bloomberg News was calling for NFPs to decline by 175,000, which would be the smallest drop in just over a year. At the same time, the unemployment rate is projected to remain at 26-year highs by rising to 9.9 percent from 9.8 percent, but ultimately, the NFP result will be the event to watch as it is extremely volatile and is one of the sole reports that impacts the US dollar from a pure fundamental point of view. A better-than-anticipated result is likely to provide a boost to the US dollar, but it will be interesting to see the impact of disappointing results as weak US data tends to weigh on risky assets and push the greenback higher amidst flight-to-quality.
