Forex Weekly Outlook Feb. 2-7

Risk aversion gripped the markets and this gave a boost to the dollar and the yen. The critical ECB rate decision and the buildup to the Non-Farm Payrolls are the highlights in a week that also features rate decisions in the UK and Australia as well as employment figures from Canada and New Zealand. Here is our weekly outlook for this week.

The Fed announced Taper 2, as expected. Together with strong GDP, the US dollar was on the rise, despite some other unimpressive numbers. In the euro-zone, fresh weakness in inflation numbers finally hit the euro, as the focus now turns to the ECB. Emerging markets’ currencies came under pressure and some made bold moves to strengthen their currencies. The fear helped Japanese yen, and hit commodity currencies, especially the kiwi, despite an imminent hike, and the loonie (fresh 4 year high for USDCAD). Let’s start:

Updates:

• ECB Preview: 5 scenarios – negative deposit rate now, or later?: The European Central Bank convenes in February as the level of inflation remains stubbornly low, and the economic recovery remains...
• US dollar strengthens against the euro: The last trading day of January saw the dollar in the ascendency, the dollar index just short of the highs...

1. US ISM Manufacturing PMI: Monday, 15:00. Manufacturing grew in December and expanded at the second-fastest pace in more than two years, reaching 57 following 57.3 in November boosted by a rise in orders. The sharp growth in orders drove companies to increase hiring and global recovery lifted business investments.  A drop to 56.2 is expected this time.
2. Australian rate decision: Tuesday, 3:00. The Reserve Bank of Australia (RBA) maintained its cash rate unchanged at 2.5% in December, in line with market consensus. RBA Governor Glenn Stevens stated the Australian economy grew less than forecasted in 2013 due to a decline in mining investment. However private demand outside the mining sector is expected to grow at a faster pace. The Australian dollar is still high, despite recent drops. The RBA board will continue to assess the outlook and adjust policy as needed, Stevens said. No change in rates is forecast, but some expect a more hawkish bias after the strong CPI numbers.
3. NZ employment data: Tuesday, 21:45. New Zealand’s unemployment rate declined more than expected in the third quarter, reaching 6.2%, down 0.2% from the previous quarter, amid growth in construction, retail and hospitality firms hired workers. Furthermore, NZ’ job market expanded 1.2% in retail, accommodation and food services, and the construction sector. The main gains were registered in Auckland and Christchurch. Full-time employment increased 1% and part-time jobs grew 1.1%. New Zealand’s job market is expected to grow by 0.7%, while the unemployment rate is predicted to decline to 6.0%.
4. US ADP Non-Farm Employment Change: Wednesday, 13:15. The US private sector gained 238,000 jobs in December, much better than the 119,000 addition projected by analysts. This release was higher by 9.000 compared to November. Over the course of 2013, goods-producers added 286,000 jobs and service-providing industries gained 170,000 jobs in December. These positive gains suggest continued growth  in 2014. A gain of 191,000 positions is expected now.
5. US ISM Non-Manufacturing PMI: Wednesday, 15:00. The US services sector activity decelerated in December, reaching 53 compared to 53.9 in November due to a decline in orders at the end of the year. However the service sector industry, showed some promising signs of stronger employment and rising prices. The slowdown reflected December’s easing in the manufacturing sector, falling to 57.0 from 57.3 in November. However the severe winter might have contributed to this decline. US services sector is expected to rebound to 53.8.
6. UK rate decision: Thursday, 12:00. The Bank of England (BoE) kept interest rates at a 0.5% and maintained its asset purchase target at £375 billion in line with predictions. Analysts believe the central bank will have to change its tone regarding the forward guidance plan, due to continued signs of recovery in the UK market. Mark Carney, said last August he does not intend to raise rates until unemployment goes down to 7.0%. If all goes well, Carney will raise rates in the second half of 2014. Rates are expected to remain unchanged this time. YoY, UK GDP rose at the fastest pace in 6 years.
7. Eurozone rate decision: Thursday, 12:45. The ECB will likely leave its policy unchanged, but could certainly set the ground for a negative deposit rate in March. Inflation continues to fall in Germany and in the euro-zone. It will be harder for Draghi and co. to deny the danger of deflation, and it will be harder to wave with a negative deposit rate and not use it eventually. In the press conference, he could use words to hint an imminent cut of both the main lending rate and the deposit rate in March, and this would hurt the euro..
8. US Trade Balance: Thursday, 13:30. The U.S. trade deficit narrowed to its lowest level in four years in November, reaching a trade gap of $34.3 billion following 39.3 billion in the previous month. Economists expected trade deficit to reach $40.2 billion in November. This improvement contributed to the Q4 GDP growth. Exports increased 0.9% to $194.9 billion. Meanwhile overall imports declined 1.4% to $229.1 billion. US trade gap  is expected to widen to $35.8  billion.
9. US Unemployment Claims: Thursday, 13:30. Weekly claims for U.S. unemployment benefits edged up 19,000 last week to one month high of 348,000 claims, but remained relatively low. The increase follows three weeks of declines and may have been pushed up by the cold weather.  However there are positive signs for growth in the third and fourth quarters indicating things are getting better and will continue to do so on the coming months. The number of unemployment claims is expected to drop to 334,000.
10. Canadian employment data: Friday, 13:30. The Canadian job market contracted 45,900 jobs in December posting the weakest year of job growth since 2009. This unexpected fall raised concerns about future growth. The unemployment rate edged up to 7.2%, following 6.9% in November. Despite rumors of a rate cut Bank of Canada governor Stephen Poloz has maintained rates in January.
11. US Non-Farm Payrolls: Friday, 13:30. US non-farm payrolls increased by 74,000 in December, far below the 196,000 gain expected by analysts. However the weak reading was related to the harsh weather conditions. Meanwhile, the unemployment rate edged down to 6.7% from the 7% in November. The labor force participation rate continued to decline, reaching 62.8% after a reading of 63% in the previous month. However, analysts believe the weak reading in December does not suggest renewed downward trend. US non-farm work force is expected to grow by 185,000, while the unemployment rate is expected to remain 6.7%. A significant revision to December’s figure could be seen now.