The Australian dollar and US dollar both face event risk at the very start of the week when the US ISM Manufacturing index and the Reserve Bank of Australia's rate decision will be released.
Meanwhile, the British pound was easily the strongest of the major currencies last week, but this may not be the case ahead of the Bank of England's expected rate cut. The European Central Bank is also due to announce a rate decision, but ECB President Jean-Claude Trichet's comments should be even more important. Finally, US and Canadian employment reports could lead the forex markets to end the week on a volatile note.
US ISM Manufacturing - February 2
Unlike the releases of personal income and personal spending earlier in the morning, the 10:00 ET release of the ISM Manufacturing index will give a more timely view of conditions in the economy. The index is anticipated to fall to a nearly 29-year low of 32.6 in January from an upwardly revised 32.9. This would mark the twelfth straight month of contraction in business activity, suggesting that the recession could continue through at least the first half of 2009. Weaker than expected results could lead flight-to-safety to push the US dollar higher, while surprisingly strong numbers could weigh the currency down.
Reserve Bank of Australia Rate Decision - February 2
The Reserve Bank of Australia is anticipated to cut rates in their fifth consecutive meeting at 22:30 ET on Monday, with a Bloomberg News poll of economists calling for a 100 basis point cash rate target reduction to a record low of 3.50 percent. However, only a larger-than-expected rate cut or comments suggesting they will continue to reduce rates aggressively may weigh on the Australian dollar. Overall, Australia is facing major headwinds from financial market instability, which has led to tighter credit conditions, as well as from both domestic and foreign demand. Indeed, global slowdown is hurting exports, something the Australian economy depends on for employment and broad growth. The situation has not been helped by significantly lower commodity prices, though it has served to cool inflation pressures, which leaves the RBA additional leeway to make monetary policy more accommodative in coming months.
Bank of England Rate Decision - February 5
The already-volatile British pound is bound to face additional volatility this week as both Credit Suisse overnight index swaps and a Bloomberg News poll reflect expectations that the Bank of England will cut rates by another 50 basis points at 7:00 ET on Thursday to a new record low of 1 percent. This is indeed within the realm of possibilities since the UK has tipped into recession and the BOE, and UK government, anticipate that things will only get worse. In fact, Bank of England Monetary Policy Committee Member David Blanchflower, who is easily the most outspoken and dovish member on the Committee, issued very dovish comments on January 29, saying that the UK economy may face a recession worse than that of the one in the 1980's and that the Bank Rate needs to be cut “further and quickly.” Furthermore, he said that the MPC has considered their options in the case that the Bank Rate is cut to zero, which was quite timely comment when you consider that Chancellor of the Exchequer Alistair Darling gave the BOE permission today to buy 50 billion pounds worth of bond and commercial paper in order to alleviate tight credit conditions. Overall, this leaves the odds in favor of year another rate cut by the BOE on February 5, but the reaction of the British pound may depend on what sort of bias is reflected in the Monetary Policy Committee's subsequent statement.
European Central Bank Rate Decision - February 5
The decline in Euro-zone CPI estimates well below the European Central Bank's 2.0 percent target, steady increases in unemployment, and increasingly pessimistic consumer and business confidence all suggest that the central bank will cut rates again. However, evidence suggests that the ECB will wait until March 5, and this is exactly what a Bloomberg News poll of economists is forecasting as well. Indeed, after the ECB cut rates to a record low of 2.00 percent on January 15, Mr. Trichet said that the next "important" meeting would be in March when they release new projections for growth and inflation, suggesting they have no plans to adjust interest rates in February. However, he refused to call 2 percent the lower limit for interest rates, leaving the door open to further reductions in coming months. As a result, the 7:45 ET announcement may not garner as much attention as ECB President Jean-Claude Trichet's post-meeting press conference at 8:30 ET. Mr. Trichet is one of the most opinionated central bank chiefs around, and suggestions that the ECB will continue to cut rates have the potential to lead the euro far lower. On the other hand, if the ECB signals that they may leave rates unchanged during their next meeting, the currency could actually rally.
Canadian and US Unemployment Reports - February 6
There will be two unemployment rate releases to watch on Friday that could have a big impact on the currency markets, one from Canada and one from the US. At 7:00 ET, the Canadian net employment change is forecasted to have fallen by 40,000 during January while the unemployment rate is anticipated to have risen to a three and a half year high of 6.8 percent from 6.6 percent. Since the employment change tends to be a very volatile release, this should have the greater impact on the Canadian dollar, with a sharper than expected drop likely to weigh on the currency and an unexpected positive result likely to push it higher.
At 8:30 ET, US non-farm payrolls (NFP's) will hit the wires and are forecasted to fall for the thirteenth straight month in January at a rate of -538,000. Something that is garnering even more attention though is the rise in the unemployment rate, which is predicted to reach 7.5 percent, the highest since September 1992, from 7.2 percent. Results in line with or worse than expectations would suggest that consumption will continue to wane through the first half of 2009, and could lead the US dollar higher on flight-to-quality amidst selling in risky assets.
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