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Profit From This Week's Three Central Bank Meetings

Discussion in 'Jarratt Davis- Trading Signals' started by Jarratt Davis, Jul 30, 2018.

  1. Jarratt Davis

    Jarratt Davis Special Consultant to the FPA

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    In this report, we will help you prepare for this week's three central bank meetings. We will also take a look at any other market-moving data points which could provide trading opportunities.

    Last week, the market's main focus revolved around speculation that the BoJ could tweak monetary policy at this week's meeting.

    This week, the market's focus will remain on the BoJ as they announce any policy adjustments at their Tuesday meeting. Furthermore, central banks will be in focus throughout the week with the FOMC and BoE announcing their latest decisions too.

    • BoJ Monetary Policy Announcement. Speculation for the BoJ to tweak policy has increased dramatically over the last week. This will likely be the highlight of the week and instrumental to JPY's fundamental outlook.
    • FOMC Monetary Policy Announcement. The FOMC is widely expected to keep rates unchanged at this meeting. However, this meeting will be key to current expectations of whether we can expect a September hike or not.
    • BoE Monetary Policy Announcement. Market consensus is for the BoE to announce a 25 basis point hike at this meeting. However, this will be a close call with a significant number of financial institutions expecting the BoE to remain on hold. This includes Credit Suisse, Westpac and UBS.
    Tuesday, July 31
    BoJ Monetary Policy Decision - JPY
    Speculation that the BoJ could tweak policy at this meeting has been a dominant theme over recent sessions. Market consensus is for any adjustment in policy to be technical and not indicative of a change in stance.

    In their latest report, Scotiabank stated:

    'No economist expects either a change in the policy rate (currently -0.1%) or a change in the ‘around zero’ guidance on the 10 year JGB yield target at this meeting.'



    ING would appear to support this outlook, stating that

    'The most likely outcome is still one that sees the status quo from the BoJ - but flags a possible October policy shift.'

    Above all else, any change announced by the BoJ is likely to be in an effort to make monetary policy more sustainable. This is certainly warranted, considering as of April 2018 the BoJ own 47.5% (¥433.8trln) of the JGB market.

    In spite of their already considerable purchases, Japan's QQE programme has had a marginal impact at best. National CPI for June printed at 0.7%, unchanged from when the BoJ announced QE3 back in April 2013.

    For this reason, the BoJ's outlook report will also be key at this meeting. According to Reuters, the BoJ will be discussing why inflation remains subdued before announcing its long-term economic and price projections.

    Overall, this meeting has the potential to cause significant volatility and influence Japan's fundamental outlook.

    Bullish scenarios for JPY would be any comments from the BoJ which signal a change in approach. This would likely include more flexibility around the 10yr yield target of 0% or even an incremental increase to 0.1%.

    Additionally, any changes to the BoJ's outlook will likely also prove market moving. Especially if they hint at future policy changes which they would likely signal through changes to their outlook on inflation.

    EU Flash CPI, Preliminary Flash GDP and Unemployment Rate - EUR
    CPI, GDP and the Unemployment Rate for the EU are all scheduled for release at the same. As all three data points are key to EUR's fundamental outlook, EUR is likely to act volatile upon release.

    Market consensus is for Flash CPI Y/Y to remain unchanged at 2.0%. Although the market expects Core CPI Y/Y to tick higher to 1.0% from 0.9% prior.

    The market expects Preliminary Flash GDP for Q2 to slow to 2.2% Y/Y from 2.5% in Q1. Although consensus remains unchanged for GDP Q/Q at 0.4%.

    Finally, for the Unemployment Rate, the market expects a fall to 8.3% from 8.4% prior. At 8.3%, the Unemployment Rate in the EU would fall to its lowest level since December 2008.

    A deviation in any of these events has the potential to move EUR. However, as the ECB's focus remains on inflation above all else, CPI is arguably the most important.

    If EU data is overall positive, we would expect EUR to be well supported, providing a long opportunity. Conversely, if overall negative, we would expect EUR to weaken, presenting a short opportunity.

    Canadian GDP - CAD
    Canada release two GDP reports; a monthly release and a quarterly release. Of the two, the quarterly releases are arguably the most important and market moving.

    Although this event will only see a month-over-month release for May, it could still prove market moving on a strong deviation. The bigger question, however, is how sustainable will a reaction to GDP be?

    Although economic data in Canada is important to CAD; the more influential factor remains NAFTA. Therefore, for GDP to provide a high conviction trade, we would look for NAFTA developments to support any deviation.

    If NAFTA continues to support CAD, we would have more conviction in a positive deviation. Conversely, if NAFTA reports turn CAD negative, we would look for a negative deviation.

    If the market's focus on NAFTA begins to fade, GDP could still prove tradable, but only as a short-term trading opportunity.

    New Zealand Employment Report - NZD
    In March 2018, the RBNZ's Policy Targets Agreement was amended to account for employment as well as inflation. The new PTA requires monetary policy to support maximum levels of sustainable employment within the economy.

    The RBNZ has arguably already achieved this with the Unemployment Rate falling to a 9-year low at just 4.4% in Q1. Therefore, although employment will remain influential to monetary policy, inflation remains the greater concern.

    For this reason, the wage growth component of New Zealand's employment report is likely to be of growing importance to the market. Especially as the Unemployment Rate continues to fall which should lead to greater pressure on wages and inflation.

    Therefore, beyond the Unemployment Rate and Employment Change, we will be looking to the Labour Cost Index. Further improvements here could hint at increasing inflation and an eventual change in policy from the RBNZ.

    Wednesday, August 1
    UK Manufacturing PMI - GBP


    UK Manufacturing PMI is the first release of the UK's three PMI reports. These reports can give valuable insight into expectations for future economic performance.

    Despite growing concerns surrounding Brexit, the market expects a print of 54.2. As a print above 50 is expansionary, at 54.2, the manufacturing sector expects to continue growing, albeit at a slower rate with last month printing at 54.4.

    This report is unlikely to have too significant an impact on GBP, especially with the BoE on Thursday. However, a significant deviation could still influence GBP in the short-term.

    A positive deviation could provide a short-term GBP long opportunity. Conversely, a negative deviation could provide a GBP short opportunity.

    FOMC Monetary Policy Decision - USD
    At their July meeting, the FOMC is widely expected to leave policy unchanged with the Fed Funds Rate remaining at 1.75%-2.00%.

    According to CME Group, the market is pricing in just a 3.0% chance of a hike at this meeting. However, market pricing for a September hike stands at 91.5%.

    Therefore, the greater focus at this meeting will be on any comments from the Fed which hint at likely action in September.

    Scotiabank notes other topics of focus include:

    • Amendments to their language on inflation.
    • Comments regarding recent growth and strengthened confidence in US economic expansion.
    • Any comments on uncertainties surrounding global trade.
    Overall, an optimistic tone from the Fed which supports a September hike will be USD positive. This could provide a USD long opportunity which could potentially be held into their September meeting.

    Conversely, a dovish tone will likely weigh on USD, especially if it causes the market to re-price its expectations for a September hike. This could provide an excellent USD short opportunity.

    It's worth noting that the US will announce ISM Manufacturing PMI earlier in Wednesday's session. However, with FOMC later in the session, we don't expect ISM Manufacturing PMI to present any trading opportunity.

    Thursday, August 2
    BoE Monetary Policy Decision - GBP
    At their August meeting, market consensus is for the BoE to announce a 25 basis point hike. This would increase the Official Bank Rate to 0.75% from 0.50%.

    However, there are numerous investment banks including Credit Suisse, UBS and Westpac who expect the BoE to remain on hold.

    Furthermore, the BoE decision to hike is not expected to be unanimous. Market consensus is for a vote split of 7-0-2.

    According to Scotiabank, however, OIS prices suggest around a 90% chance of a BoE hike. Furthermore, they argue that the BoE has not attempted to tamper rate hike expectations as they did before their May meeting.

    Wells Fargo also points out that in spite of some recent soft data, the MPC has publicly stated that rates eventually need to rise.

    With a rate hike by no means a certainty, the announcement of a hike is likely to result in a spike higher in GBP. However, whether the initial reaction is sustainable or not will depend on the accompanying statement and inflation report.

    If the market interprets the BoE's hike as a 'one and done' hike, any initial strength will likely reverse, and GBP weaken. Conversely, if the BoE suggest further hikes are likely, GBP strength will likely continue.

    Of course, Brexit remains an ongoing concern for the UK economy, and any further Brexit developments could overshadow the BoE. For this reason, the ideal opportunity will see any developments surrounding Brexit support any sentiment created by the BoE.

    It's worth noting that before the BoE, we will see UK Construction PMI. However, as this event is so close to the BoE, we do not expect it to provide any high conviction opportunity.

    Friday, August 3
    UK Services PMI - GBP
    UK Services PMI is the final and most important UK PMI releases. This is because the UK's services sector is by far the largest and most important sector for economic growth.

    According to the Office for National Statistics, the UK's services sector accounts for 79% of UK GDP.

    Once again, a reading above 50 would significantly further expansion and below 50 would signify contraction.

    Considering this event is the final of all three and follows the Bank of England, there will likely already be a strong sentiment bias for GBP. For this reason, we will look for a deviation in Services PMI which supports the prevailing sentiment bias for GBP.

    If a deviation in Services PMI contrasts with the prevailing bias, it could still provide an opportunity but of lower conviction. This will ultimately depend on the strength of the prevailing bias and the size of the deviation.

    US Employment Report - USD
    The final event of the week will be the US employment report.

    The market’s initial reaction to US employment typically results from NFP. However, as inflation remains the Fed's greater concern, Average Earnings is the more important data point.

    A positive print from Average Earnings will continue to support further rate hike expectations and USD's bullish fundamental outlook.

    A miss on Average Earnings is unlikely to cause the market to question the Fed's rate hike path. However, a significant deviation could cause the market to re-price its expectations and USD to weaken temporarily.

    Of course, any deviation in the Unemployment Rate will also be influential. Especially if we see a surprise fall and break below May's 3.8%.

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

    Summary
    Given the number of market moving events scheduled for this week, there should be plenty of opportunities to make pips.

    The BoJ, FOMC and BoE will all be instrumental to their respective currency's fundamental outlook. These events could provide excellent short-term and long-term trading opportunities.

    Of course, geopolitics remains a key influence in the present environment. This means Brexit should be closely monitored for GBP and US protectionism for USD.

    Furthermore, given JPY's status as a safe haven, any strong risk tone could overshadow the BoJ and JPY's fundamental outlook in the short-run.

    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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