The following article is based on research by Marshall Gittler, Head of Investment Research for FXPRIMUS.
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FXPRIMUS Week in Focus for the week beginning 1 Aug: RBA, Bank of England, US payrolls
The time for inaction is over. Both the Reserve Bank of Australia (RBA) and the Bank of England (BoE) are expected to cut rates this week. The other focus of attention will be the US nonfarm payrolls, which are expected to return to a more normal level after the recent abnormal readings. Outside of the data, participants in all markets will be watching the oil price.
The RBA is generally expected to cut rates. Following their last meeting, Gov. Stevens ended his statement by saying that “further information” should allow the Board decide whether any “adjustment” to policy would be appropriate. The “further information” came about a week later, when 2Q headline inflation fell further on a year-on-year basis. The market is pricing in a 67% probability of a cut, while 20 out of 25 analysts expect one. Those are good odds but not a certainty, which means AUD may weaken slightly if they do cut.
The BoE is a bit more complicated. There’s no question that the BoE is going to do something, after a string of weak post-Brexit data. The market is pricing in 100% chance of a cut, with the vast majority of economists forecasting a 25 bps cut to 0.25%. The question is about the Bank’s asset purchase program: while most economists see that remaining unchanged at 375bn, some are forecasting an increase up to 525bn. The market has now fully priced in a cut in rates and no change in the asset purchase program; GBP is not likely to weaken noticeably unless they do more than that.
The US nonfarm payrolls are forecast to be 175k, almost exactly back at the 6m moving average of 172k and in line with the forecast for Wednesday’s ADP report (170k). This would show a strengthening of the labor market from the April-June average of 147k. A number like that could cause the market to reprice Fed rate expectations and strengthen the dollar.
Outside of these events, the main point will be the final PMIs for June, including today’s China PMIs, both the official and Caixin version. The official one was lower but the Caixin one recovered to above the 50 line, showing surprising strengthen and boosting risk assets.
Today’s ISM manufacturing index is likely to be the most important one. With the US Q2 GDP figure coming in so much weaker than expected, market participants will want to see signs of strength in the US economy in order to imagine that the Fed will be able to hike rates later this year. Today’s ISM manufacturing index is expected to be unchanged while the price paid index is forecast to be up slightly. That probably won’t be enough to shake anyone’s convictions about the FOMC and as a result could prove USD-negative.
While the final PMIs are usually not a big thing for the market, the downward revision to the UK manufacturing PMI today was a further blow to the UK. If the service sector PMI on Wednesday is similarly revised down, that will be another shock. In addition, the UK construction PMI comes out on Tuesday; that’s expected to collapse to 44.0 from an already-weak 46.0 the previous month, adding to the gloom over GBP.
Outside of the data, the markets will be watching the oil price. Energy has been weighing on global stocks. If falls below $40 for any length of time, it could once again spark doubts about the economy and dash any hopes that inflation might come back to normal levels any time soon. CAD may prove vulnerable if oil falls further.
