Five Events To Profit From This Week

Jarratt Davis

Special Consultant to the FPA
In this article, we will review the top five risk events for the week ahead. This will include the most likely outcomes and scenarios you could profit from.

Last week, markets initially focused on USD weakness as a lack of new drivers saw many participants take profit on USD longs.

This resulted in DXY falling back to August lows and EURUSD break above the 1.17 handle.

This week, we expect USD to remain in focus. This should provide clarity about whether last week’s initial weakness was only temporary or the start of a deeper correction.

Alongside, the release of US employment, as pointed out by ING, Trump could push for further tariffs on China.

Alongside, USD, AUD and CAD will also be in focus with both Australia and Canada having several key releases. This week’s key events will be:

  • RBA Cash Rate announcement and accompanying Rate Statement. This will be key for AUD fundamental outlook and can heavily influence sentiment in the following sessions.
  • Australian GDP for Q2. A key data point for evaluating Australia’s recent economic performance.
  • BoC Overnight Rate announcement and accompanying Rate Statement. With the BoC in the midst of a tightening cycle, this will be key to CAD’s future outlook.
  • US and Canadian employment reports. With both of these key events released simultaneously, they tend to create significant volatility and great trading opportunities.
RBA Cash Rate Announcement and Rate Statement
At their September meeting, the market expects the RBA to leave policy unchanged with the Cash Rate at 1.50%.

According to ASX, the market is pricing in a 0% chance of a 25 basis point hike at this meeting.

Of course, this is unsurprising as the market isn’t expecting a rate change from the RBA until at least 2H19.

Furthermore, expectations have likely been further pushed back by Westpac’s recent announcement.

This was neatly summarised by ING in their weekly report:

‘Last week we said the Aussie dollar hasn’t really got a lot going for it – and lingering hopes of a Reserve Bank of Australia rate hike in 2H19 may have been the only thing propping up the currency. Those hopes were severely dented after Westpac Bank’s decision to independently raise mortgage lending rates citing a structural increase in wholesale funding costs. Should the other major domestic banks follow, this will reduce the need for the RBA to raise the benchmark cash rate (policy rate) and reduce the likelihood of a rise in market rates that matter for the currency.’

If the RBA imply that they will be on hold for longer following Westpac’s decision, AUD will likely weaken.

Conversely, if there is no mention or suggestion of any change to their outlook, AUD could see a reprieve.

Alongside, Westpac’s recent announcement, other key areas of note will be EM risks and US/China trade war risks.

With numerous factors presenting risks to Australia’s economy, the bias for this meeting will be to the downside.

A more dovish tone will continue to weigh on AUD presenting a short opportunity.

Conversely, a surprisingly upbeat tone could support AUD, even if it’s more neutral than outright hawkish.

Australia Gross Domestic Product
Australian GDP for Q2 will be another key event for AUD this week. There will be two key releases, GDP Q/Q and GDP Y/Y.

Both measures are significant enough to move markets and influence AUD sentiment.

The market expects GDP to be slightly softer in Q2. The market is looking for GDP to print at 0.7% Q/Q and 2.8% Y/Y versus Q1’s 1.0% Q/Q and 3.1% Y/Y.

Nevertheless, the data will still be more than enough for Australia to continue its streak of positive growth.

According to the Australian Bureau of Statistics, Australia hasn’t had a period of negative growth since 1991.

Another strong report could see some temporary AUD strength.

However, with ongoing risks surrounding EM and US/China trade wars, this report is unlikely to have any material impact for AUD.

BoC Overnight Rate Announcement and Rate Statement
At their September meeting, the market expects the BoC to leave policy unchanged with the Overnight rate at 1.50%.

Market expectations for rates to remain unchanged are almost unanimous, with only Scotiabank looking for a hike.

In their weekly released publication, Scotiabank argues two key points for higher rates:
  1. Canada’s economy is operating around full capacity conditions judged by a composite of measures such as output gaps, industrial capacity utilization rates and labour market conditions.
  2. Core inflation is on-target already with headline inflation temporarily overshooting.
If Scotiabank are correct and the BoC does announce a 25 basis point hike, expect immediate CAD strength.

This would provide an excellent CAD long opportunity, entering on the surprise announcement.

If the overall market is correct and the BoC remain on hold, the market will turn its attention to the accompanying statement.

In the accompanying statement, the market’s focus will be on any further insights into future hikes.

The market is currently looking towards October for the next hike. However, some participants don’t expect another move by the BoC until early 2019.

A hawkish tone from the BoC, reinforcing expectations for an October hike should be CAD positive. While a dovish tone, causing the market to price out October will be CAD negative.

Of course, another key focus for CAD is NAFTA. A factor which has been further reinforced by a deal between the US and Mexico.

Any significant NAFTA announcements could potentially overshadow the BoC. So it’s important to factor any NAFTA developments into any CAD trading opportunity.

US Employment
The US’s employment report consists of three major releases.
  1. Non-Farm Employment Change.
  2. Average Hourly Earnings.
  3. Unemployment Rate.
The initial reaction often results from NFP. Although the more important data point and sustainable reaction come from Average Earnings.

This is because Average Earnings has an underlying influence on inflation. Which is arguably more important to future policy in the US at this moment in time.

A significant increase in Average Earnings could increase rate hike expectations. While a miss on Average Earnings could weigh on rate hike expectations.

Of course, any deviation in the Unemployment Rate will also be influential. Especially as market consensus is for a drop back down to May’s 3.8%.

If the Unemployment Rate were to beat market consensus (3.7% or lower), unemployment would be at its lowest since 1969.

Given the number of market-moving data points released at once, this event tends to see prices whipsaw. The trick is to only enter once you’ve analysed all three components and are sure of the overall bias.

An overall positive bias should see USD strengthen, providing a USD long opportunity. Conversely, an overall negative bias should result in USD weakness, presenting a short opportunity.

Canada Employment
Canada’s employment report consists of two key releases:
  1. Unemployment Rate.
  2. Employment Change.
Of the two, the initial reaction typically comes from Employment Change. This is because this component can deviate quite significantly from expectations.

Furthermore, we can break Employment Change down into Full-Time and Part-Time Employment Change. This means the report can be misleading if Full-Time contrasts with the headline.

Therefore, for the best opportunity, any deviation in Employment Change should be a result of Full-Time Employment. If a deviation results from Part-Time Employment, the eventual outcome will be uncertain.

Regarding the Unemployment Rate, any significant deviation from expectations will likely influence CAD. However, this too could create volatility if it contrasts with the Employment Change.

Of course, as this event follows from the BoC, it’s important to also take any residing sentiment into account.

If the BoC resulted in a strong sentiment bias, the best opportunity would see Canadian employment data support the BoC.

If it contrasts, you will need to consider whether employment was significant enough to change the existing sentiment.

In this report, we have highlighted five key events which could all provide great trading opportunities.

Events such as the RBA and BoC could have a profound influence on our fundamental outlook.

While events such as Australian GDP and US employment, are likely to only influence sentiment, but still provide great trades.

As is always the case, successful trading is about understanding what’s moving markets.

If you understand how these events impact and influence expectations, you will be in a much better position to profit from them.

The goal of this article is to help you improve your understanding and ability to trade risk events.

If you would like to learn more about risk event trading, please type your question in the comments below.


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