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FX Technical Analysis (2016-10-31)

by James Chen

Fundamental Recap: Hectic Stretch Ahead for Markets

The next week and a half will likely prove to be among the busiest several days of the year for global financial markets due to the sheer volume and potentially far-reaching consequences of upcoming events. Aside from what promises to be an exceptionally unique US presidential election on November 8th, the most important events will largely be dominated by major central bank decisions, including that of the US Federal Reserve, along with a deluge of key economic data, most notably the US non-farm payrolls (employment) report for October.

This week’s series of potentially market-moving central bank events begins early on Tuesday when major monetary policy decisions emerge from both the Reserve Bank of Australia (RBA) and the Bank of Japan (BoJ). The RBA is not expected to make any changes to interest rates after it cut rates in August, but the tone of its statement should impact the Australian dollar. Consumer inflation data out of Australia last week came out higher than expected, but the most recent Australian employment report came out much worse than expected. As a result, the RBA may lean towards the dovish side, which could place further pressure on the Australian dollar.

Meanwhile, the Bank of Japan is also not expected to make any major policy changes. BoJ Governor Haruhiko Kuroda has already told Japan’s parliament recently that the he saw no need for more easing measures to be implemented this week, though he also said that “there may be some modification to our forecast that inflation will hit our 2% target during fiscal 2017.” The yen has been in weakening mode against the US dollar in the past month. BoJ comments this week, especially if no major policy changes are announced by the central bank once again, could result in a rebound for the Japanese yen.

On Wednesday, of course, comes the long-awaited November Federal Reserve (FOMC) meeting. Currently, the market-viewed probability of a Fed rate hike next week remains low, at less than 10%. A mid-December rate hike continues to be the most likely scenario, with futures markets betting on a nearly 80% implied probability of it occurring in December. This week’s meeting will be important, however, as the Fed should provide further clues as to the likelihood of interest rate movement in December, as well as its potential monetary policy trajectory going forward. The US dollar has been in a sharp incline and maintaining its strength within the past month ahead of the Fed’s upcoming decisions, as expectations for a rate hike by the end of the year have increasingly become stronger.

To round out the central bank parade this week, the Bank of England (BoE) will be stating its monetary policy decision on Thursday. No change in interest rates is expected after August’s Brexit-inspired rate cut of 25 basis points. The British pound has been reeling from Brexit-related woes as of late, especially since UK leadership recently put a deadline on the UK’s official exit from the European Union early next year. Meanwhile, GBP/USD continues to stagnate just off its October “flash crash” lows as the specter of the Brexit deadline looms ever closer. Better-than-expected Q3 GDP figures out of the UK last Thursday may have partially allayed fears of a slowdown, but the negative economic effects of the historical separation may simply be yet to come.

Aside from the four central banks that will be reporting, markets will also be inundated by major economic data releases that will likely impact markets substantially. Here are some of the most prominent releases:

Tuesday

  • China Manufacturing & Non-Manufacturing PMI
  • UK Manufacturing PMI
  • Canada GDP
  • US ISM Manufacturing PMI

Wednesday

  • New Zealand Employment Change & Unemployment Rate
  • UK Construction PMI
  • US ADP Employment Change

Thursday

  • Australia Trade Balance
  • UK Services PMI
  • US Weekly Jobless Claims
  • US ISM Non-Manufacturing PMI

Friday

  • Australia Retail Sales
  • Canada Employment Change & Unemployment Rate
  • US Non-Farm Employment Change, Unemployment Rate & Average Hourly Earnings

Aside from the critical central bank decisions, the most important releases this week with respect to the markets will, as usual, revolve around the US jobs report at the end of the week. And immediately beyond this week, of course, the US presidential election looms large. This pivotal event has become progressively less of a market risk event, however, as the status quo candidate, Hillary Clinton, has continued to extend her lead over her opponent, Donald Trump, who the markets have long perceived as a high-risk factor. With that being said, though, the short-run-up to election day could very well prove to hold some surprises for the markets.

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