OANDA senior currency strategist Alfonso Esparza outlines his outlook for the week ahead in FX, given the fact that central bankers will be highly active. Alfonso also offers a timeline and shares his take on why he feels September’s FOMC remains the best chance for the Fed to start a tightening cycle without triggering too much volatility in the market.
Macro Headwinds Have Market Doubtful Fed Will Raise Rates in September
Central bankers will be active the week of September 14 to 18. The Reserve Bank of Australia (RBA) will publish the minutes from its monetary policy meeting on Monday, September 14. The Bank of Japan (BOJ) will issue its monetary policy statement on late Monday. The BOJ Governor will then address members of the press on Tuesday, September 15. Governor Kuroda will have a busy week as he is back on the forex schedule on Thursday, September 17 to speak at the National Securities Industry Convention, in Tokyo. Thursday will be a wall to wall central bank action day with The Swiss National Bank will publish its Monetary Policy Assessment and announce its interest target rate for Libor at 3:30AM ET.
The main event of the week comes when the Federal Reserve will issue its Federal Open Market Committee (FOMC) economic projections, statement, and federal funds rate at 2:00PM ET followed by Chair Janet Yellen press conference at 2:30PM. The interest rate hike window that caused the lowest amount of volatility is probably gone as the effect of macro economic headwinds have increased towards the end of the year. The September FOMC meeting is not anticipated to bring the much-awaited interest rate hike but the press conference will give the market some answers as the Fed will be questioned on its timing.
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Monday, September 14
- 9:30PM AUD Monetary Policy Meeting Minutes
- Tentative JPY Monetary Policy Statement
Tuesday, September 15
- Tentative JPY BOJ Press Conference
- 4:30AM GBP CPI y/y
- 5:00AM EUR German ZEW Economic Sentiment
- 8:30AM USD Core Retail Sales m/m
- 8:30AM USD Retail Sales m/m
- Tentative NZD GDT Price Index
Wednesday, September 16
- 4:30AM GBP Average Earnings Index 3m/y
- 4:30AM GBP Claimant Count Change
- 8:30AM CAD Manufacturing Sales m/m
- 8:30AM USD CPI m/m
- 6:45AM NZD GDP q/q
Thursday, September 17
- 2:35AM JPY BOJ Gov Kuroda Speaks
- 3:30AM CHF SNB Monetary Policy Assessment
- 4:30AM GBP Retail Sales m/m
- 8:30AM USD Building Permits
- 8:30AM USD Unemployment Claims
- 10:00AM USD Philly Fed Manufacturing Index
- 2:00PM USD FOMC Economic Projections
- 2:00PM USD FOMC Statement
- 2:00PM Federal Funds Rate
- 2:30PM USD FOMC Press Conference
- 7:30PM AUD RBA Gov Stevens Speaks
Friday, September 18
- 8:30AM CAD Core CPI m/m
NEXT PAGE: A Strong Obstacle for the USD to Overcome
|pagebreak|Inflation Putting Pressure on BOJ, Abe Awaiting on Corporate Japan to Spend
The BOJ is expected by market analysts to increase its economic stimulus as inflation continues to disappoint. Market surveys point to a third of economists forecasting a further easing call in October. There are a couple of respondents that call for action as early as Tuesday, but so far they are in the minority.
Liberal Democratic Party lawmaker Kozo Yamamoto was vocal on last Thursday, saying the BOJ must increase its easing program by at least $85 billion, with the October policy meeting a good opportunity.
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The JPY has weakened versus the USD as Japanese inflation fails to take off as promised by Prime Minister Shinzo Abe. The BOJ Governor Haruhiko Kuroda was recruited into the central bank after he supported the feasibility of a 2% inflation rate for the Japanese economy. External shocks like the drop in commodity prices, in particular energy has been a boon to local producers, but has been a major obstacle for the inflation target.
Kuroda has not been forthcoming about the timing on further monetary policy easing, but he has taken the 0.1% money market rate floor off the table. The last time the Japanese central bank expanded its stimulus package was back in October of 2014 on Halloween day, in a move that spooked markets.
Business confidence in Japan has risen, but capital expenditure has not risen on par with optimism. Japanese companies plan to spend 6.1% more this year, an improvement of an earlier 5.9 gain. Wage inflation and higher investment from companies are needed if Shinzo Abe hopes to reach his lofty goal of 2% inflation for Japan.
US Retail Sales Solid But Not Rate Hike Solid
US retail sales beat expectations last month with an increase of 0.6% in the headline figure and 0.4% in core retail sales (excluding auto). The forecasts are lower this time around with 0.4% for retail sales and 0.1% for core retail sales given some seasonal factors and the overall weakness of the price of gas. August sales in chain stores were weaker, but did pick up ahead of the Labor day weekend and are tracking head of last year with a growth of 1.3%. The Census Bureau’s Advance Report on Retail and Food Services Sales will be published on Tuesday, September 15 at 8:30AM ET.
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Lower Gas Price Expected to Lower Retail Sales in August
Retail sales has been a strong obstacle for the USD to overcome. Employment has been the strongest component pointing to a recovering US economy, but the quality of the jobs has been questioned as wages have not increased. More people with jobs has not translated into more consumer spending which is what is needed to kickstart a virtuous cycle of economic growth.
NEXT PAGE: What Raised Some Optimism About the First Rate Hike?
|pagebreak|Federal Reserve Running Out of Room to Hike Before End of Year
The market has been progressively discounting the probability of a September rate hike as early as the June FOMC announcement of no change to the interest rates. The next likely candidate became September, more because it is a meeting followed by a press conference, unlike October’s FOMC, than any other factor.
A strong non-farm payrolls (NFP) number on September 4 raised some optimism about the Federal Reserve firing the much awaited first rate hike. The Chinese stock market sell-off put big question marks on the state of the global economy. The Fed is the caretaker of the US economy, but if it impacts the rest of the world negatively, it will come back to haunt US growth. The International Monetary Fund (IMF) and similar organizations have asked the Fed to hold off raising rates this year.
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Fed policy members have been divided in their comments, which has added confusion to what the market expects from the central bank. It is a fact that the post crisis recovery has arrived, but it is an uneven recovery. The number of American jobs has increased, but it is the quality of those jobs that is in question. Wages have not risen and the lack of consumer spending shows the jobs don’t leave Americans with enough disposable income. Retail sales are recovering at a slower pace with various setbacks but alone do not justify higher interest rates.
Consumer sentiment fell on last Friday to 85.7 when a 91.4 reading was expected given the strong survey results last month (92.9). This is the lowest level in 2015 and even if the Fed members were still unsure on their vote, this will probably put the rate on hold until conditions improve. If the Fed keeps the US interest rate unchanged at below 0.25, the USD is due for hard sell-off as interest rate divergence expectations will not come to pass.
September’s FOMC remains the best chance for the Fed to start a tightening cycle without triggering too much volatility in the market. Volatility is inevitable, even as this much-awaited event comes to pass. A horrible first quarter destroyed the June FOMC chances of being the chosen one to start raising rates. In hindsight, given how those GDP numbers were revised and the economy bounced back, it would have made more sense to do it back then. The Fed will probably be thinking that too and trying to avoid it if possible, which is why September remains on the table and will do so until the rate announcement either validates or scratches it out of contention.
By Alfonso Esparza,Senior Currency Strategist, OANDA
