Beginning of December Brings Central Bank Cheer: RBA, ECB, and NFPs

DailyFX

Talking Points:

- Central bank-centric calendar first week of December.

- Global PMI week as well – uptrend looks to continue.

- Despite no meeting, Fed remains omnipresent with NFPs on Friday.

December tends to be a lower month in volatility overall, although the past few years haven’t been exactly calm during the 4Q (2008: US financial crisis; 2010: beginning of QE2; 2011: Euro-Zone debt crisis; 2012: US fiscal cliff).

Nevertheless, we envision that organic risk appetite (predicated on economic growth) as well as stimulus speculation (will central banks work to keep interest rates pinned down) will guide FX trends amid a flurry of central bank activity and economic data that directly impacts central bank activity.

In terms of direct interaction with the central banks, we are looking at four rate decisions: RBA (Tuesday), BoC (Wednesday), BoE (Thursday), and ECB (Thursday). The most important and market-moving events are those for the RBA and the ECB. Notably, the latter surprised the market by cutting its benchmark unexpectedly at the last meeting and there is talk amongst policymakers and speculators that a stimulus program could follow – whose impact on the Euro largely depends on the form the stimulus takes.

The Fed’s QE3 program, however, still holds the mantle of most influential stimulus program – enough so that it has fundamentally altered investment habits. The true litmus test for stimulus watchers and trend mavens though is the November NFPs. This indicator is a known market mover and its influence on the QE3 taper time table is well-known.

Rate Hike Probabilities / Basis-Points Expectations

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Beginning_of_December_Brings_Central_Bank_Cheer_RBA_ECB_and_NFPs_body_Picture_1.png, Beginning of December Brings Central Bank Cheer: RBA, ECB, and NFPs

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Beginning_of_December_Brings_Central_Bank_Cheer_RBA_ECB_and_NFPs_body_Chart_1.png, Beginning of December Brings Central Bank Cheer: RBA, ECB, and NFPs

See the DailyFX Calendar for a full list, timetable, and consensus forecasts for upcoming economic indicators. See all of this week’s “high” importance events.

12/03 Tuesday // 03:30 GMT: AUD Reserve Bank of Australia Rate Decision

As was the case at the November meeting, the RBA is expected to keep its main rate on hold at 2.50%. The central bank’s brief policy statement last month stated that inflation remained consistent with medium-term targets and that a lower Australian Dollar would likely be needed to achieve balanced growth (a dovish tilt).

With the AUDUSD down approximately –4% since the prior meeting, market participants will be looking for statements on the recent price action. The central bank has said before that measures could be taken to weaken the currency. Failure to embolden the dovish rhetoric amid a rate hold could pave the way for a short covering rally (speculative positioning remains negative, per the most recent CFTC’s COT report).

Survey: 2.50% (hold)

Prior: 2.50% (hold)

The key pairs to watch are AUDNZD and AUDUSD.

12/04 Wednesday // 00:30 GMT: AUD Gross Domestic Product (3Q)

Following the RBA, surveys point to a one-tenth of a percent reduction in Australian growth in the 3Q’13. With the Australian Dollar having gone through a multi-week decline, a better than expected print here combined with a constructive statement out of the RBA may provide much needed support for a near-term pullback in the decline. Nevertheless, uncertainties in China continue to weigh on commodity bloc currencies, and a miss here could renew calls for a rate cut in early-2014.

Survey: +0.7% (q/q), +2.5% (y/y)

Prior: +0.6% (q/q), +2.6% (y/y)

The key pairs to watch are AUDNZD and AUDUSD.

12/05 Thursday // 12:45 GMT: EUR European Central Bank Rate Decision

Following a rate cut of 25-bps last month, the ECB is expected to hold its interest rate path steady, although the ECB has said before that rates could be cut further if the disinflation situation accelerates. The real volatility will come from Mr. Draghi’s press conference at 13:30GMT, where he could outline the steps for new near-direct liquidity injections into the economy. A FLS-like (of the Bank of England) LTRO might not lead to a decline in the Euro.

Read more on this week’s European Central Bank Rate Decision.

Survey: 0.25% (hold); liquidity scheme for SMEs.

Prior: 0.25% (25-bps cut).

The key pairs to watch are EURGBP and EURUSD.

12/05 Thursday // 13:30 GMT: USD Gross Domestic Product (3Q S) (Annualized)

This will be the last GDP print before the Federal Reserve meets for its December meeting. The reading, combined with Friday’s NFPs, will certainly set the tone in regards to speculation of a December taper. It is important to note that the impact of the government shutdown will not be registered in this third quarter print. If the print meets expectations, it will be the best print since the spring of 2012.

Survey: +3.1% (y/y)

Prior: +2.8% (y/y)

The key pairs to watch are EURUSD and USDJPY.

12/06 Thursday // 13:30 GMT: USD Change in Nonfarm Payrolls (NOV)

The busy week of event risk will culminate with one of the most critical: the headline US labor market report. Although current estimates predict March as the month for the Federal Reserve’s reduction in asset purchases, a strong NFP print here may stir speculation of a December taper and thus support the greenback henceforth.

The Unemployment Rate is also estimated to tic down a tenth of a percent from 7.3% to 7.2%. A further deterioration in the Participation Rate could dampen enthusiasm over any positive data. (We suggest watching the Employment subcomponents of the ISM surveys this week,)

Survey: +180K

Prior: +204K

The key pairs to watch are EURUSD and USDJPY.

--- Written by Christopher Vecchio, Currency Analyst and Gregory Marks, DailyFX Research

To contact Christopher Vecchio, e-mail cvecchio@dailyfx.com

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