The combination of four major rate decisions along with the release of US non-farm payrolls (NFPs) leaves the forex markets likely to remain highly volatile.
Reserve Bank of Australia Rate Decision - March 2
The Reserve Bank of Australia is anticipated to cut rates in their sixth consecutive meeting at 22:30 ET on Monday, with a Bloomberg News poll of economists calling for a 25 basis point cash rate target reduction to a record low of 3.00 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, with signs of neutrality likely to actually boost the currency. 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 Canada Rate Decision - March 3
The Canadian dollar could see a pickup in volatility on Tuesday at 9:00 ET as the Bank of Canada is widely expected to cut interest rates for the fifth time since October. A Bloomberg News poll of economists reflects consensus forecasts for a 50 basis point cut to 0.50 percent, but as of Friday, Credit Suisse overnight index swaps were only fully pricing in a 25 basis point reduction to 0.75 percent. As it stands, economic conditions have deteriorated rather rapidly over the past few months, as retail sales fell in December by the most since 1991 while Ivey PMI held below 50 for the third straight month, signaling a contraction in business activity. However, as we so often see when it comes to rate decisions, the Canadian dollar's reaction may hinge more upon the policy bias contained within the Bank's concurrent press release. Any indications that they may leave rates unchanged at their next meeting in order to await more data could send the Canadian dollar spiraling higher, while remarks suggesting that they are open to cutting rates more or pursuing quantitative easing could send the currency lower.
Bank of England Rate Decision - March 5
The already-volatile British pound is bound to face additional volatility this week as a Bloomberg News poll reflects 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 0.50 percent. This is indeed within the realm of possibilities given the exceptionally dovish commentary we've been hearing from BOE officials lately. On Tuesday, BOE Monetary Policy Committee (MPC) member Andrew Sentance cited an increased risk of deflation if “the recession is prolonged and deep, and though “persistent” price declines “remain an outside risk,” there is “a strong case for providing additional stimulus to the economy to head it off more decisively.” On Wednesday, BOE MPC member David Blanchflower, said that the UK recession may worsen "significantly" and that the downturn has not yet hit a "bottom," which left UK monetary policy "overly restrictive" with the Bank Rate at a record low of 1 percent. He went on to say that the central bank should cut rates to at least 0.5 percent, go neutral and then pursue quantitative easing "quickly," something that the UK Treasury has yet to approve. It is worth noting that Blanchflower is easily the most dovish member of the MPC, but his remarks obviously still hold some weight in the markets. Overall, this leaves the odds in favor of another rate cut by the BOE on March 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 - March 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 on March 5 by 50 basis points to 1.50 percent. Indeed, after the ECB cut rates to a record low of 2.00 percent on January 15, ECB President Jean-Claude Trichet said that the next "important" meeting would be in March when they release new projections for growth and inflation. Furthermore, 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 will garner quite a bit of attention, but traders should also look to Trichet's post-meeting press conference at 8:30 ET. 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.
US Non-Farm Payrolls, Unemployment Rate (FEB) - March 6
At 8:30 ET, US non-farm payrolls (NFP's) will hit the wires and are forecasted to fall for the fourteenth straight month in February at a rate of -645,000, which would be the single worth month of job losses since October 1949. Something that is garnering even more attention though is the rise in the unemployment rate, which is predicted to reach a 25-year high of 7.9 percent from 7.6 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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