Jarratt Davis
Special Consultant to the FPA
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In this report, we will take a look at this week’s three UK risk event reports. We will also review any other risk events which could present tradable opportunities.
Last week, the market’s focus turned back to monetary policy as both the RBA and RBNZ announced their latest decisions.
Although the RBA’s meeting was uneventful, the RBNZ struck a decidedly dovish tone, weakening NZD.
According to ANZ, following the RBNZ’s dovish signal, the timing for the first projected OCR hike was pushed out a year versus the May statement.
This week, the market’s focus will likely shift to UK monetary policy with several key UK data points up for release.
UK Employment – GBP
The UK’s employment report will be our first high conviction opportunity of the week.
This report consists of multiple data points which means it can create significant volatility if it prints mixed.
Although UK employment is important, the true value of this report is what it signals for inflation.
This is because with the Unemployment Rate residing at 4.2%, the UK’s labour market is cause for little concern to the BoE.
For this reason, inflation will remain the primary indicator as to when the BoE decides to next hike interest rates.
This means the most important component of the UK’s employment report is the Average Weekly Earnings numbers.
The market expects Average Weekly Earnings for June to remain unchanged from last month at 2.5%.
Any significant deviation here could prove market moving, with GBP strengthening on an increase and weakening on a fall.
Of course, the Unemployment Rate, Claimant Count Change and Employment Change will also be important. However, from a fundamental perspective, they do hold less importance.
Nevertheless, any significant deviation in either data point could influence GBP sentiment. Especially if the report has a clearly positive or negative bias.
With that said, Brexit developments will likely continue to overshadow any UK data.
For this reason, the market’s sentiment towards Brexit should always be taken into account when trading GBP.
Wednesday, August 15
UK Consumer Price Index – GBP
Following from Tuesday’s UK employment report, we will see the UK’s inflation report. The first thing to consider here will be any remaining sentiment from employment or Brexit.
The market expects CPI Y/Y for July to increase to 2.5% from 2.4% in June. While consensus for Core CPI Y/Y is another print at 1.9%, unchanged from June.
Month-over-month, the market expects CPI to print flat at 0.0% and for Core CPI to once again fall at -0.1%.
For the ideal trading opportunity, any deviation from CPI should support the existing sentiment bias for GBP.
If CPI contrasts with the existing bias, the key is to determine whether any deviation in CPI is significant enough to change the market’s bias.
We would argue that uncertainty over Brexit will remain the dominating influence for GBP, regardless of data.
However, if there are no new Brexit developments, a deviation in CPI could influence BoE rate hike expectations and hence GBP.
ING would appear to support this view as they recently stated:
‘While the 2Q GDP figures would have lifted the pound under normal circumstances… they were not strong enough to knock markets out their current Brexit lull. We would need to see some significantly positive economic numbers to do so – and given how the economy is intrinsically linked to the Brexit outcome, this seems unlikely.’
Thursday, August 16
Australian Employment – AUD
Australia’s employment report is another event this week which could provide a high conviction trading opportunity.
Once again though, there are external factors which we need to consider.
The main influence on AUD over recent weeks has been the US/China trade war.
This is because China is Australia’s largest trading partner and the world’s largest importer of commodities.
Market consensus for July’s employment data is the Unemployment Rate to remain unchanged at 5.4%.
However, the market expects Employment Change to print at 15.0K, a significant fall from last month’s 50.9K.
Of course, when evaluating Employment Change, it’s important to consider the full-time component.
If the report deviates, but as a result of part-time employment, the headline is likely to be misleading.
For the ideal trading opportunity, any deviation in Employment Change should be a result of full-time employment.
Furthermore, any sentiment from trade wars should also support any bias from Australia’s employment report.
If any sentiment bias from employment data contrasts with trade war concerns, we expect trade wars to remain the ultimate driver.
UK Retail Sales – GBP
Although UK Retail Sales is less important than employment and inflation data, it could still provide a trading opportunity.
The key is to look for a deviation which supports the prevailing sentiment bias.
In essence, Retail Sales is merely a catalyst to enter into a GBP trade but not a stand-alone reason to trade GBP.
Any significant deviation in Retail Sales could see an initial spike higher or lower in GBP.
If the data supports any prevailing bias, you could use Retail Sales to enter into the market, benefiting from the initial reaction.
However, if Retail Sales contrasts with the prevailing bias, you could consider fading the market’s initial reaction.
This is because as Retail Sales is unlikely to change the market’s bias, you would simply be using Retail Sales to enter at a more attractive price level.
Friday, August 17
EU Final Consumer Price Index – EUR
Inflation in the EU remains the ECB’s primary concern for setting monetary policy.
For this reason, any significant deviation in Final CPI could influence EUR sentiment and fundamental outlook.
Considering the wide range of views on when the ECB will hike rates, data points such as CPI will be key to forming an overall consensus.
The market expects Final CPI to remain unrevised from the flash estimate at 2.1% for the headline and 1.1% for the core.
Any significant revisions from the flash estimates could provide a great trading opportunity.
If CPI beats expectations, EUR is likely to strengthen, presenting an EUR long opportunity. If CPI misses expectations, EUR is likely to weaken, presenting a short opportunity.
Canadian Consumer Price Index – CAD
The last high conviction opportunity of the week will be from Canadian CPI for July.
The market expects CPI for July to remain unchanged at 2.5%. With CPI M/M printing flat at 0.0%.
Although there is no consensus for core measures, any sizable increase or decrease could prove market moving.
If headline CPI deviates positively or core measures increase significantly, CAD is likely to strengthen.
Conversely, if headline CPI disappoints or core measures slow, CAD is likely to weaken.
Of course, NAFTA also remains instrumental for the future direction of CAD.
Therefore, we would recommend considering any sentiment bias from NAFTA before entering any CAD trade.
If NAFTA developments are CAD positive, we would have higher conviction in a positive CPI report.
Conversely, if NAFTA is proving to be CAD negative, we would have more conviction in a negative CPI report.
Summary
Once again, external influences continue to remain the primary driving factors of most currencies.
For this reason, when looking to trade this week’s three UK risk events, it’s crucial to also consider any sentiment created by Brexit.
Ultimately, we expect Brexit to remain the dominating factor of GBP. Therefore, monitoring Brexit will be key to successfully trading GBP.
Likewise, you should consider US/China trade wars when trading AUD and NAFTA when trading CAD.
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.
Last week, the market’s focus turned back to monetary policy as both the RBA and RBNZ announced their latest decisions.
Although the RBA’s meeting was uneventful, the RBNZ struck a decidedly dovish tone, weakening NZD.
According to ANZ, following the RBNZ’s dovish signal, the timing for the first projected OCR hike was pushed out a year versus the May statement.
This week, the market’s focus will likely shift to UK monetary policy with several key UK data points up for release.
- Employment Report. The UK’s labour market is in a fairly strong condition and shouldn’t pose any concern for the BoE. For this reason, the most valuable insight will come from the wages components.
- Consumer Price Index. This is arguably the most influential data point for future monetary policy expectations.
- Retail Sales. The least important of this week’s three releases. However, as a leading indicator, this can still provide valuable insights and move GBP.
UK Employment – GBP
The UK’s employment report will be our first high conviction opportunity of the week.
This report consists of multiple data points which means it can create significant volatility if it prints mixed.
Although UK employment is important, the true value of this report is what it signals for inflation.
This is because with the Unemployment Rate residing at 4.2%, the UK’s labour market is cause for little concern to the BoE.
For this reason, inflation will remain the primary indicator as to when the BoE decides to next hike interest rates.
This means the most important component of the UK’s employment report is the Average Weekly Earnings numbers.
The market expects Average Weekly Earnings for June to remain unchanged from last month at 2.5%.
Any significant deviation here could prove market moving, with GBP strengthening on an increase and weakening on a fall.
Of course, the Unemployment Rate, Claimant Count Change and Employment Change will also be important. However, from a fundamental perspective, they do hold less importance.
Nevertheless, any significant deviation in either data point could influence GBP sentiment. Especially if the report has a clearly positive or negative bias.
With that said, Brexit developments will likely continue to overshadow any UK data.
For this reason, the market’s sentiment towards Brexit should always be taken into account when trading GBP.
Wednesday, August 15
UK Consumer Price Index – GBP
Following from Tuesday’s UK employment report, we will see the UK’s inflation report. The first thing to consider here will be any remaining sentiment from employment or Brexit.
The market expects CPI Y/Y for July to increase to 2.5% from 2.4% in June. While consensus for Core CPI Y/Y is another print at 1.9%, unchanged from June.
Month-over-month, the market expects CPI to print flat at 0.0% and for Core CPI to once again fall at -0.1%.
For the ideal trading opportunity, any deviation from CPI should support the existing sentiment bias for GBP.
If CPI contrasts with the existing bias, the key is to determine whether any deviation in CPI is significant enough to change the market’s bias.
We would argue that uncertainty over Brexit will remain the dominating influence for GBP, regardless of data.
However, if there are no new Brexit developments, a deviation in CPI could influence BoE rate hike expectations and hence GBP.
ING would appear to support this view as they recently stated:
‘While the 2Q GDP figures would have lifted the pound under normal circumstances… they were not strong enough to knock markets out their current Brexit lull. We would need to see some significantly positive economic numbers to do so – and given how the economy is intrinsically linked to the Brexit outcome, this seems unlikely.’
Thursday, August 16
Australian Employment – AUD
Australia’s employment report is another event this week which could provide a high conviction trading opportunity.
Once again though, there are external factors which we need to consider.
The main influence on AUD over recent weeks has been the US/China trade war.
This is because China is Australia’s largest trading partner and the world’s largest importer of commodities.
Market consensus for July’s employment data is the Unemployment Rate to remain unchanged at 5.4%.
However, the market expects Employment Change to print at 15.0K, a significant fall from last month’s 50.9K.
Of course, when evaluating Employment Change, it’s important to consider the full-time component.
If the report deviates, but as a result of part-time employment, the headline is likely to be misleading.
For the ideal trading opportunity, any deviation in Employment Change should be a result of full-time employment.
Furthermore, any sentiment from trade wars should also support any bias from Australia’s employment report.
If any sentiment bias from employment data contrasts with trade war concerns, we expect trade wars to remain the ultimate driver.
UK Retail Sales – GBP
Although UK Retail Sales is less important than employment and inflation data, it could still provide a trading opportunity.
The key is to look for a deviation which supports the prevailing sentiment bias.
In essence, Retail Sales is merely a catalyst to enter into a GBP trade but not a stand-alone reason to trade GBP.
Any significant deviation in Retail Sales could see an initial spike higher or lower in GBP.
If the data supports any prevailing bias, you could use Retail Sales to enter into the market, benefiting from the initial reaction.
However, if Retail Sales contrasts with the prevailing bias, you could consider fading the market’s initial reaction.
This is because as Retail Sales is unlikely to change the market’s bias, you would simply be using Retail Sales to enter at a more attractive price level.
Friday, August 17
EU Final Consumer Price Index – EUR
Inflation in the EU remains the ECB’s primary concern for setting monetary policy.
For this reason, any significant deviation in Final CPI could influence EUR sentiment and fundamental outlook.
Considering the wide range of views on when the ECB will hike rates, data points such as CPI will be key to forming an overall consensus.
The market expects Final CPI to remain unrevised from the flash estimate at 2.1% for the headline and 1.1% for the core.
Any significant revisions from the flash estimates could provide a great trading opportunity.
If CPI beats expectations, EUR is likely to strengthen, presenting an EUR long opportunity. If CPI misses expectations, EUR is likely to weaken, presenting a short opportunity.
Canadian Consumer Price Index – CAD
The last high conviction opportunity of the week will be from Canadian CPI for July.
The market expects CPI for July to remain unchanged at 2.5%. With CPI M/M printing flat at 0.0%.
Although there is no consensus for core measures, any sizable increase or decrease could prove market moving.
If headline CPI deviates positively or core measures increase significantly, CAD is likely to strengthen.
Conversely, if headline CPI disappoints or core measures slow, CAD is likely to weaken.
Of course, NAFTA also remains instrumental for the future direction of CAD.
Therefore, we would recommend considering any sentiment bias from NAFTA before entering any CAD trade.
If NAFTA developments are CAD positive, we would have higher conviction in a positive CPI report.
Conversely, if NAFTA is proving to be CAD negative, we would have more conviction in a negative CPI report.
Summary
Once again, external influences continue to remain the primary driving factors of most currencies.
For this reason, when looking to trade this week’s three UK risk events, it’s crucial to also consider any sentiment created by Brexit.
Ultimately, we expect Brexit to remain the dominating factor of GBP. Therefore, monitoring Brexit will be key to successfully trading GBP.
Likewise, you should consider US/China trade wars when trading AUD and NAFTA when trading CAD.
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.
