Five Events That Currency Traders Should Watch

07/13/2010 12:01 am EST

Focus: FOREX

Kathy Lien

Managing Director and Co-Founder BKForex LLC, BK Asset Management

The lack of US data Monday morning made for a quiet North American open this week. The dollar remained unchanged or stronger against most of the major currencies. China reported very strong export figures on Saturday, but the third month of declining imports has some traders worried about the appetite of Chinese consumers. Here are the top five things that could affect how currencies trade this week, in order of importance:

1) US Retail Sales Report 

The most important event risk this week is the US retail sales report. Concerns about the sustainability of the US recovery and the degree of consumer spending have been among the main reasons why investors have turned against the dollar. The market's focus has shifted from the balance sheet problems in Europe to the disappointments in US data. Recent reports show the housing market has taken a turn for the worse, while manufacturing and service activity have slowed. Private sector payrolls continue to grow, but the economy as a whole has returned to net job losses. Consumer spending is the missing link to this whole puzzle, and if American consumers are still spending, then these worries are overdone. However, if consumers cut spending for the second month in a row—as the market expects—then the dollar could be headed for big trouble. 

2) Chinese Economic Data 

Although this weekend's trade numbers from China did not have a big impact on the forex markets, the rest of the data due this week are important enough to trigger a meaningful reaction in the market. Second quarter GDP, inflation, retail sales, and industrial production are among the economic reports scheduled for release. Based upon the consensus forecasts, analysts expect the Chinese recovery to slow. If they correct, we could see the data trigger a wave of risk aversion, and the weaker the numbers, the more significant the selloff. However, if the data surprises to the upside—and they certainly could after the strong export numbers—we could see the rally in the forex market resume. The risk appetite in the financial markets this week is as dependent on Chinese data as it is on US economic data. 

3) Earnings Releases 

The earnings season kicks off this evening with reports from Alcoa. According to a Wall Street Journal article, analysts believe the largest US companies will post a 19.3% year-over-year increase in per-share profits this quarter. Given the strength of the dollar in the second quarter, which can hurt the profitability of multinational US companies, these projections may be overly optimistic.  If Yum Brands (YUM), Google (GOOG), General Electric (GE), or other companies reporting this week warn about the impact of FX fluctuations on earnings, it could strip away some of the optimism. JPMorgan Chase (JPM), Bank of America (BAC), and Citigroup (C) are also among the big names reporting this week, and how the corporate sector has performed could affect how USD/JPY and other currencies trade. 

4) EcoFin Meeting on Tuesday 

The finance ministers of the European Union hold their regular monthly meeting on Tuesday. Typically, no major announcements are expected, but members of the EU could make suggestive hints about the stress test results due on July 23. There have been concerns that the scenarios being tested are not extreme enough, but a German newspaper quoted ECB member Stark today as saying "The (stress test) assumptions will be made in a way that the test results will be credible." The main focus of the meeting is to "Decide on the opening of excessive deficit procedures and will follow up the procedures already initiated." However, a press conference will be held when the meeting ends, and the euro could be affected if any comments are made about the stress tests.   

5. FOMC Minutes

On Wednesday, the Federal Reserve is scheduled to release the minutes from its most recent monetary policy meeting. The latest comments from Bernanke suggests that he is still very worried about the outlook for the US economy, and because of that, we expect the minutes to contain a very subdued tone, which could weigh on currencies. 

Most of this week's events pose a risk for the US dollar, and because of that, currencies and equities should trade very cautiously. Bernanke is speaking at 10 am ET, but he is only giving opening remarks at a Fed forum on "Addressing  the Financing Needs of Small Businesses," which is not expected to be market moving.      

By Kathy Lien of GFTForex.com

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