Forex Weekly Outlook May 5-9

A very busy week ended with a drama around the Non-Farm Payrolls and left some uncertainty about the next market moves. The list of events for the coming week includes: US ISM Non-Manufacturing PMI, Trade Balance, Janet Yellen’s testimony, and rate decisions in Australia, the UK and the Eurozone, with the latter promising a lot of action. Here is an outlook on the main market-movers awaiting usr this week.

European  inflation numbers came out worse than expected, but is it enough for action from the ECB? Draghi’s headache is probably worsening. In the US, we can see a distinction between the weak GDP in Q1, and the promising data from Q2. Is the bounce strong enough? The Fed acknowledged the gap and in any case, continued tapering for the fourth time. The Non Farm Payrolls provided a great show: the US gained 288K jobs and this certainly boosted the US dollar. However, within an hour, the tables turned and the greenback lost its shine. Is volatility making a comeback?

Updates:

• May 5, 16:00: ISM Non-Manufacturing PMI 55.2 in April – better than expected: ISM Non-Manufacturing PMI at 55.2 points on April 2014. The US economy continues growing steadily according this number. The ISM Non-Manufacturing purchasing managers’...

1. US ISM Non-Manufacturing PMI: Monday, 14:00. The US service sector rebounded mildly in March reading 53.1 after a sharp drop to 51.6 in February. Economists expected a slightly higher reading of 53.5% in March. The employment index registered the biggest climb rising 6.1 points to 53.6, from 47.5 in February. Furthermore, other components such as new orders and export orders increased, indicating the US economy continues to expand. US service sector is expected to advance further to 54.3.
2. Australian rate decision: Tuesday, 4:30. The Reserve bank of Australia decided to maintain its cash rate at 2.5% in light of stronger than expected job figures as well as a climb in domestic demand and improvement in household finance. Furthermore, the ABS reported a surge in retail sales, rising 1.2% in January, beating market consensus. No change in rates is expected this time.
3. US Trade Balance: Tuesday, 12:30 The U.S. trade deficit increased in February to $42.3 billion, reaching its highest level in five months due to lower demand for American exports. U.S. exports plunged 1.1% to $190.4 billion as sales of commercial aircraft, computers and farm goods fell. Imports climbed 0.4% to $232.7 billion, mainly autos and clothing. The increase in deficit caused some economists to reduce their estimate for overall economic growth for the January-March quarter. However analysts believe deficit will shrink this year with the help of exports. The U.S. trade deficit is expected to narrow to $40.1 billion.
4. NZ employment data: Tuesday, 22:45. The jobless rate in New Zealand edged down to 6.0% in the fourth quarter of 2013 from 6.2% in the third quarter, in line with market forecast. New Zealand’s job market expanded by 1.1% in the final quarter of 2013, exceeding forecasts for a 0.6% increase. On a yearly basis, employment picked up 3.0%, far better than the 2.4% estimated. The employment rate reached 64.7 % with 2,297,000 people in the work force. The participation rate reached 68.9%, beating expectations for 68.6 %. New Zealand’s job market is expected to advance by 0.7% in the first quarter, while the unemployment rate is predicted to decline to 5.8%.
5. Janet Yellen speaks: Wednesday, 14:00. Federal Reserve Chair Janet Yellen will speak in Washington D.C. before the Joint Economic Committee of Congress. The question and answer session may provide info about important monetary policy issues. Market volatility is expected. It will be interesting to hear her view on more tapering in light of the fourth such move and the recent jobs report.
6. Australian employment data: Thursday, 1:30. The Australian unemployment rate edged down to a four-month low of 5.8% in March, following 6.1% in February. An addition of 18,100 jobs in March and 48,200 in February, helped lower the rate, suggesting a growth trend in the Australian economy. Full-time positions fell 22,100 in the month and part-time employment was up 40,200. However, the federal employment minister, Eric Abetz, cautioned against reading too much into one month’s numbers because of a decline in the labor force participation rate. Australian job market is expected to add 9,600 jobs while the unemployment rate is expected to reach 5.9%.
7. UK rate decision: Thursday, 11:00. The Bank of England kept its key interest rate unchanged at a record low of 0.50%, amid a continuous growth trend in Britain’s economy. The bank also maintained the stimulus program of 375 billion pounds, in government bonds that it has purchased over the past five years. The BOE is not expected to change rates until next year according to analysts. GDP increased 0.8% in the first quarter of 2014. Growth in the first quarter is expected to reach 0.9% with lower unemployment and increased economic activity. The Bank of England is expected to maintain rates and monetary policy.
8. Eurozone rate decision: Thursday, 11:45, press conference at 12:30. The ECB could cut the main lending rate by 0.10% and leave the deposit rate at 0% in an attempt to lower the value of the euro without using the heavier tools. Draghi’s dilemma is becoming a big headache. He would prefer to have a lower value of the euro against both the dollar and the Chinese yuan without having to take action. It worked amazingly well with the OMT. However, even his stronger and more explicit verbal interventions to lower the exchange rate are having a diminishing effect. The excellent US NFP was not enough to do the job for Draghi. More words without action could damage his credibility. Inflation is low and well below the 2% target, but not below 0.5% – a level that would probably force the ECB to act. With core inflation standing at 1%, it will be hard for Draghi to convince his German colleagues to use the “nuclear option” of setting a negative deposit rate. Regarding QE, it is quite complicated in the euro-zone and probably left as the last option.  Cutting only the main lending rate has a very marginal effect on the EZ economies, but still shows that the ECB can act and not only talk. With such a move, Draghi can hope for a lower exchange rate and leave the other, bigger tools as big bazookas and nothing else.
9. US Unemployment Claims: Thursday, 12:30. The number of Americans filing initial claims for unemployment benefits increased last week to 344,000 from 330,000 in the previous week. The reading was higher than the 317,000 anticipated by analysts. However this rise may be attributed to seasonal adjustment issues caused by the Easter holiday. Analysts believe that the real measure of claims is much lower. Another good sign is the ADP non-farm employment change report released a day before showing a rise of 220,000 jobs in April following 209,000 in the previous month. US Jobless claims is expected to rise by 328,000 this time.
10. Canadian employment data: Friday, 12:30. Canada’s labor market expanded by 42,900 in Marchdriven by jobs for Canadian youths aged 15 to 24. This rise helped push down the unemployment rate by 0.1% to 6.9%, beating forecast of 7.0%. The majority of job addition is part-time. Employment in health care and social assistance edged up, while the agriculture sector continued to shrink. Canada’s labor market is expected to expand by 21,400 jobs, while the unemployment rate is expected to remain at 6.9%.
11. US JOLTS Job Openings: Friday, 14:00. The JOLT Job Openings jumped to a 6 year high in February, reaching 4.17 million. This rise indicates a growth trend in the US economy as employers hire more people due to meet rising consumer demand. However, the quit rate remained unchanged at 1.7% a higher quit rate means employees are confident that they can find a new jobs. Chair Yellen, cited these indicators as important indicators for the Job market strength. The JOLT Job Openings is expected to reach 4.21 million.