As the markets awake from the “summer slumber,” Friday’s non-farm payrolls report will kick off a huge month in FX, which includes the FOMC meeting, two elections, and big policy decisions from around the world.
Here at the onset of September, let’s take a moment to examine why this is such a pivotal month for the foreign exchange market. Not only are investors finally coming back from their summer holidays so trading volume can return to normal, but we have some major event risks that go beyond this week's five central bank rate decisions and Friday’s non-farm payrolls (NFP) report.
See also: 5 Big FX Events from All Over the Globe
While all of these releases are important and will help kick off the action in September, the real focus should be on the following (listed in order of importance):
1. September 18-19: Federal Open Market Committee (FOMC) Monetary Policy Meeting
2. September 22: German Election
3. September 7: Australian Election
4. Japanese Consumption Tax
5. US Debt Ceiling
The most important event risk this month is, of course, the September FOMC meeting. The central bank has made it clear that it plans to reduce asset purchases before Federal Reserve Chairman Ben Bernanke steps down this year, but with two weeks until the next Fed meeting, there is still no major consensus as to when the central bank will act.
While Friday’s non-farm payrolls report will help clarify the outlook, it is looking more and more like an 11th-hour decision. Aside from NFPs, we will also be listening very carefully to all of the speeches made by US policymakers for clues about where they stand on the tapering debate.
Reducing asset purchases is a major policy change, and the decision won't be a simple yes or no. The Fed will need to decide how much to taper, which asset purchases will be tapered, and whether this reduction is the beginning of a series of moves.
The answer to each of these questions is crucial to the US dollar (USD) outlook. If the Fed opts for a more measured move that involves only a small reduction in Treasury purchases, the dollar could weaken slightly in disappointment, and if the Fed makes no changes this month, we expect the dollar to plunge.
However, if the central bank thinks it is time to be aggressive and reduces purchases of Treasuries and mortgage-backed securities in a meaningful way, it will cause a sharp rise in US yields and sizable dollar gains.
The US debt ceiling talks will also start to gain traction this month, and depending on how difficult the discussions are this time around, we could see some additional volatility in the greenback.
Elections Loom in Germany, Australia
In the FX market, politics can often overshadow economics, and this month, there are general elections in both Germany and Australia. The Australian elections are on September 7, and at this stage, it appears that the opposition party (right wing LPA) in Australia will win, forcing the Labour party to cede control of the government.
For the Australian dollar (AUD), a win by the opposition party could mean more aggressive fiscal reforms that should be viewed as positive for the currency.
In Germany, election season will shift into high gear this week, and there will be more talk about Greece and the need for another bailout. Chancellor Angela Merkel is not a complete shoe-in for re-election, but she is expected to win, and continuity would be good for the Eurozone and the euro (EUR) in general.
Japanese Debate Controversial Sales Tax
Finally, the Japanese still haven't decided what to do about the proposed consumption tax. Prime Minister Shinzo Abe supports the tax, but his administration is worried that the economy won't be able to handle it.
Recent economic data has been good, but the September 9 Q2 GDP revisions will be a crucial element to the government's decision. If Abe moves forward with the consumption tax, it could be viewed as positive by investors because it keeps the government on track to meet the deficit-reduction targets. However, if they pass on levying the tax, it would be positive for Japanese stocks and USDJPY, but it could hurt investor confidence and weaken Japan's fiscal position.
See related: A Japan Policy Move Sure to Prove Taxing
2 Top Choices for Next Fed Chairman
At the same time, expect ongoing speculation about who will replace Ben Bernanke as the next Federal Reserve Chairman. Fed Governor Janet Yellen was deeply involved with crafting the central bank's forward guidance and would represent continuity for the central bank. She, like Bernanke, has a more cautious demeanor and would be more measured in response to any future crises.
Former White House economic advisor Larry Summers, on the other hand, is more of a wild card, as he can be loose with his words, which can be dangerous for a Fed Chairman, but he has extensive crisis management experience and is often considered the more clever and creative of the two candidates. There's no bad choice here, though, because both are more than qualified.
September is generally an active month in the financial markets, and with so much going on, we expect even more activity, which could lead to breakout moves in the currency markets.
By Kathy Lien of BK Asset Management