Three Risk Events That Could Make You Money

Jarratt Davis

Special Consultant to the FPA
In this week's report, we will take a look at the week ahead. We will place particular focus on this week's top three opportunities and discuss how you could profit from them.

Last week, markets were primarily focused on central banks. According to Central Bank News, there were 18 central bank meetings last week.

Of course, the highlights of the week came from the Fed's and ECB's policy meetings.

This week, the market will likely continue to focus on the Fed and ECB. Both Draghi and Powell will be speaking throughout the week and in a joint ECB panel discussion.

However, it's unlikely they will say anything too dissimilar from what we heard last week. Instead, we believe the best trading opportunities will be:
  • New Zealand Gross Domestic Product. The RBNZ has made it clear that the next move in rates is as likely to be a cut as a hike. Therefore, key data such as GDP will be highly influential in determining an overall bias.
  • Bank of England Monetary Policy Decision. This will be a key event for determining rate hike expectations and monetary policy expectations as a whole.
  • Canadian Consumer Price Index. Inflation is one of the most influential factors to the BoC's policy decisions.

Tuesday, June 19
RBA Monetary Policy Meeting Minutes - AUD
The first opportunity of the week will come from the release of the RBA's meeting minutes. These minutes will relate to their June 5 meeting where the RBA kept policy unchanged.

At the meeting, the RBA reiterated that low level of rates continues to support economy. However, inflation and wage growth are likely to remain low for a while.

The RBA added that they do expect a pickup in domestic growth this year and next year. However, a strengthening AUD would result in slower pick up of growth and inflation.

Overall, the RBA failed to surprise markets, resulting in a relatively muted reaction. As the meeting was a non-event, we find it unlikely that this will provide any opportunity.

Wednesday, June 20
ECB Forum On Central Banking
The ECB's forum on central banking will run from Monday, June 18th to Wednesday, June 20th. ECB's Draghi will speak on a number of occasions over this period, any of which could present a trade.

On the Wednesday of this event, the heads of the RBA, BoJ and Fed will join Draghi in a panel discussion. Any comments from Lowe (RBA), Kuroda (BoJ), Powell (Fed) or Draghi has the potential to move their currency.

As the ECB, BoJ and Fed all held meetings last week, we're not expecting much. Nevertheless, this event certainly has potential and is worth sticking around for.

Gross Domestic Product - NZD
The first of the week's top three opportunities will be New Zealand GDP for Q1. This event will consist of two key releases, GDP Q/Q and GDP Y/Y.

Market consensus is for GDP Q/Q to print at 0.5% and GDP Y/Y to print at 2.7%. This is slightly slower than Q4 2017's 0.6% Q/Q and 2.9% Y/Y.

The RBNZ has made it clear that the next move in rates is as likely to be a cut as a hike. Therefore, key economic data such as GDP will be highly influential to the market's bias.

If economic data deviates positively, the market is likely to lean more to the bullish side. Likewise, the RBNZ is likely to become more hawkish over time.

If data disappoints, the market is likely to lean to the bearish side, and the RBNZ become more dovish over time.

A strong deviation and clear bias will likely influence NZD price action for the rest of the week.

If GDP beats expectations, NZD will likely strengthen and sentiment to turn bullish. This would make for a great NZD long trade.

If GDP disappoints, NZD will likely weaken, and sentiment turn bearish. This would make for a great NZD short trade.

If there is no strong deviation or the data prints mixed, there will likely be no clear opportunity.

Thursday, June 21
SNB June Meeting - CHF
At their June meeting, the market widely expects the SNB to keep policy unchanged. This would keep interest rates at their historical lows of -0.75%.

The SNB are well known for talking down CHF and, therefore, any jawboning is unlikely to see any reaction. Furthermore, according to ING, the SNB is unlikely to provide a catalyst for more CHF strength by signalling a tighter policy stance.

With jawboning ineffective and the SNB unlikely to be hawkish, we expect the SNB to be a non-event. The better opportunity for trading CHF will likely be from safe haven flows if we get a risk-off tone.

BoE June Meeting - GBP
The BoE's June meeting will be the second of our top three opportunities and the highlight of the week. This event will consist of the Bank Rate announcement, BoE Vote Split and Policy Summary.

At this meeting, the BoE is widely expected to leave policy unchanged with the Bank Rate at 0.50%. Furthermore, the market expects the BoE Vote Split to remain at 2-0-7.

The first trading opportunity here will be if the vote split does deviate. If another member votes to hike, shifting the vote split to 3-0-6 or higher, GBP will strengthen.

Conversely, if McCafferty or Saunders recants their hike, GBP will weaken. This will shift the vote split to 1-0-8 or event 0-0-9.

If the vote split remains unchanged, the market will turn its attention to the Policy Summary. Here the market will be looking at the BoE's overall tone.

A particular focus here will be on any comments to the UK's recent mixed data or to Brexit developments.

Any concern over the economy or Brexit, the market will perceive as dovish. While a lack of concern or dismissive tone will come across as hawkish.

If the BoE presents a hawkish tone, suggesting an August hike is likely, GBP will strengthen. Conversely, a dovish tone with rate hike expectations pushed back will weaken GBP.

Friday, June 22
Consumer Price Index - CAD
Canadian CPI for May will be our final trading opportunity of the week. CPI is key to the BoC's monetary policy decisions and will, therefore, influence CAD's fundamental and sentiment outlook.

Current expectations are for BoC to hike rates by 25 basis points in Q3 and then again in Q4. However, a disappointing CPI report could push expectations back, weakening CAD.

Of course, a positive CPI report would further support rate hike expectations and CAD.

It's worth noting that there are four key releases for Canadian CPI, CPI M/M, CPI Y/Y, Core CPI M/M and Core CPI Y/ Y. However, there are only expectations provided for CPI M/M and CPI Y/Y.

Although there are no expectations, Core CPI can still be market moving. This can happen if the data differs significantly from last month's data.

If Core CPI improves from last month, the market will consider it positive. If Core CPI slows from last month, the market will consider it negative.

A positive deviation in headline CPI and an improvement in Core CPI will be CAD positive. A negative deviation in headline CPI and slowing Core CPI will be CAD negative.

If the data prints mixed, CAD will likely experience volatility until the market determines an overall bias. This could still provide an opportunity; however, it will be of a lower conviction.

There are many tier one risk events this week, any of which could provide opportunities. However, hopefully, it has become clear where the best opportunities are.

New Zealand GDP, the BoE's June decision and Canadian CPI could all provide excellent opportunities. Each of these events has the potential to influence sentiment and the fundamentals.

If a clear sentiment bias for any of these currencies develops before their release, you could trade into them. Of course, any strong bias created from the events will also provide opportunities to trade out of them.

As for the RBA's Minutes, ECB's Forum and the SNB, although we don't expect much, they could surprise. Therefore, if you can be around for these events, it's certainly worth doing so.

The goal of this report 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 leave a comment below.