This week is setting up to be the most important week in economic news in 2010 as there are multiple things happening this week that will induce major volatility. So hang on to your hats folks!
While there is ample news from around the globe this week, the markets will be focused on what is going on in the US first and foremost. On Tuesday, mid-term elections are taking place that are expected to change the landscape of Congress which in turn could mean a change in market sentiment. As if that is not major enough, the following day will be the FOMC meeting where Helicopter Ben is expected to announce some form of QE2. The question up until now is just how much that might be.
On Friday, the US Non-Farm Payrolls report is due which is normally a very significant report though it may take a backseat to Tuesday and Wednesdays’ events.
I think this puts every other country in “wait and see” mode as they are more likely to react to what happens in the US then to announce policy that could exacerbate any Fed action. That is exactly what the Japanese plan to do, as they have moved up their rate decision meeting to follow the FOMC.
In addition, we have rate decisions coming from Australia on Tuesday and Europe and the UK on Thursday. With all of this on the table, I would say that most other news this week is just noise.
However, the market is starting the week in risk-taking mode, as Chinese manufacturing figures came in better than expected showing no sign of a slowdown there, and the Euro is noticeably week as there are some markets closed for holidays.
In the forex market:
Aussie (AUD): The Aussie is higher as risk appetite is the theme of the morning and the Chinese news has given it an added boost ahead of tomorrow’s RBA rate policy meeting. Will the RBA raise rates to stem inflation ahead of the US QE2? I don’t think so at this point but it still could be enough to push the Aussie back to parity with USD. (Click chart to enlarge)
Kiwi (NZD): The Kiwi is higher for the same reasons as Aussie, without the benefit of a rate policy meeting. Inflation figures came in lower than the previous reading, confirming the RBNZ position to keep rates steady last week. Unemployment figures are due mid-week.
Loonie (CAD): The Loonie should remain quiet until the end of the week when employment figures are released. Expect the Loonie to trade on risk themes, including the price of oil, and watch for the size and scope of US QE2.
Euro (EUR): The Euro is lower, bucking its anti-Dollar status and unable to hold ground above 1.40 vs. USD. The ECB rate decision is due on Thursday, and despite the market belief that the Dollar will be weaker, the Euro is not advancing like would be expected. (Click chart to enlarge)
Pound (GBP): The Pound is mostly higher as would be expected on a risk-taking day, there are questions surrounding what the BOE will do with regard to monetary easing. The UK economy appears to be moving along and there have been three opposing views about policy.
Dollar (USD): The Dollar’s movement has been the primary driver of markets of late as all eyes are on the election but more importantly QE2. The prevailing “wisdom” is that the Fed is going to announce some sort of on-going operation, with the first number mentioned acting as a sort of “down payment”. For all of his flaws, I think Bernanke is really trying to manage market expectations, though it remains to be seen if that’s even possible.
Yen (JPY): The Yen is lower across the board much to the relief of the BOJ. However, with USD/JPY trading just above 80, we could see the 70s in short order. This is one of the reasons why the BOJ moved up their target rate decision. An unusual price spike in USD/JPY had the market think potential intervention, but that is unconfirmed and unlikely. (Click chart to enlarge)
Wow! As you can see, there is a lot going on this week. When markets get busy like this there is always increased volatility.
As already noted, the focus is on the FOMC meeting Wednesday as that could set the near-term trend for the direction of the Dollar and thus other markets and currencies as well.
Trade cautiously as one false move or statement or reaction could send markets flying! Are you excited yet?
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