The One Currency You Should Be Selling This Week

A look at the risk events for the week commencing 30th April 2018 and the one currency heading lower no matter what.
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In this article, we will review the economic calendar for the week beginning 30th April 2018.

We will highlight this week’s key economic data points and provide an overview of how to trade them. 

We will also be looking at the one currency that will most likely remain bearish no matter what the data shows.

According to ING, the market’s focus last week was on the US 10Y government bond yield and its rally to the 3% level.

Bloomberg credited USD’s recent strength to the US 10Y’s rally, suggesting it will be key to USD performance going forward.

This week, we will continue to focus on USD although there could also be opportunities to trade GBP, AUD and NZD.

The events we will be looking to trade this week are:

  • Tuesday, May 1st
    • RBA Monetary Policy Decision 
    • UK Manufacturing PMI 
    • New Zealand Employment Report
  • Wednesday, May 2nd
    • UK Construction PMI
    • FOMC Monetary Policy Decision
  • Thursday, May 3rd
    • UK Services PMI
    • US Employment Report

Tuesday, May 1st

RBA Monetary Policy Decision

The first of our anticipated events will be the RBA’s monetary policy decision.

This event will see the RBA announce any changes to the Cash Rate along with the release of the Rate Statement.

According to ASX, 30 Day Interbank Cash Rate Futures are pricing in a 0% chance of a rate hike at this meeting.

Furthermore, all 43 analysts polled by Reuters also expect the RBA to remain on hold.

This means a surprise hike or cut will provide an excellent trading opportunity.

If the RBA announces a surprise cut, reducing the Cash Rate to 1.25% or lower, we will look to sell AUD.

If the RBA announces a surprise hike, increasing the Cash Rate to 1.75% or higher, we will look to buy AUD.

If the Cash Rate remains unchanged, there will likely be no significant reaction.

Following the Cash Rate, the market will turn its attention to the Rate Statement.

In the Rate Statement, the RBA will highlight their current outlook for the economy.

They will also discuss any other factors which influenced their monetary policy decision.

This means the RBA’s Rate Statement helps to shape the market’s future expectations.

If the RBA is hawkish with a positive outlook of the economy, AUD will likely strengthen.

A more hawkish stance would likely see the RBA remove any references to there being no rush in hiking rates.

This lack of urgency was very apparent in the release of the RBA’s April Minutes.

If the RBA is dovish, showing any concern over the economy, AUD will likely weaken.

A more dovish stance would likely see the RBA remove their statement ‘it is more likely the next move in the cash rate will be up rather than down‘.

UK Manufacturing PMI

Manufacturing PMI is a monthly survey and leading economic indicator.

The Survey asks purchasing managers to rate current business conditions and future expectations.

This allows the market to gain a greater insight into how an industry is likely to perform going forward.

If the PMI is above 50, the industry is likely to expand in the months ahead.

This is bullish for the currency, especially if the data also beats expectations.

If the PMI prints below 50, the industry is likely to contract in the months ahead.

This is bearish for the currency, especially if the data also misses expectations.

Given GBP has weakened over recent weeks due to disappointing data, the bias for GBP is to the downside.

If UK data continues to disappoint, rate hike expectations will continue fall.

This would weigh on GBP sentiment, providing another trading opportunity.

Even if the data is positive, the bias is likely to remain bearish with the market selling any rally.

New Zealand Employment Report

New Zealand’s Employment Report will consist of the Unemployment Rate and Employment Change.

These two data points will provide the market with an insight into the health of the labour market.

According to Statistics New Zealand, the Unemployment Rate currently stands at 4.5%.

This suggests that New Zealand’s labour market is strong and should not be a concern to the RBNZ.

Nevertheless, any significant deviation is likely to see NZD strengthen or weaken.

The best opportunity will be if both data points deviate together.

If both data points beat expectations, NZD will likely strengthen.

If both data points miss expectations, NZD will likely weaken.

If the data prints in line with expectations or mixed, there is unlikely to be any clear bias or opportunity.

Wednesday 2nd May

UK Construction PMI

Following from Tuesday’s Manufacturing PMI, Wednesday will see the release of Construction PMI.

Once again, a print above 50 would indicate expansion and a print below 50, contraction.

Tuesday’s Manufacturing PMI can influence how the market reacts to Construction PMI.

For example, if both data points miss expectations, GBP is more likely to weaken.

On the other hand, if they print mixed with one positive and one negative, the reaction will be more subdued.

Even in this scenario, the bias will remain to the downside due to falling rate hike expectations.

FOMC Monetary Policy Decision

This is the week’s main event and one you do not want to miss!

The market expects the FOMC to remain on hold with only a 6.7% chance of a hike according to CME group.

The recent rally in US yields is a result of the market’s interest rate expectations.

Investors Business Daily suggest the recent strength in yields reflect growing bets for four hikes this year from the Fed.

This is in contrast to the Fed’s most recent dot plot which continues to suggest the Fed will only hike three times.

According to CME group, the market is currently pricing in an 8.5% chance of four hikes this year.

Therefore, this meeting is pivotal as it will allow the market to reassess the Fed. A hawkish Fed could result in yields rising further and the 10Y breaking above the 3% level.

This would be USD positive and likely result in USD strengthening across the board.

Of course, there is a risk the Fed disappoint and continue to suggest that there will only be three hikes.

If this is the case, yields will likely fall, and USD weaken.

In either case, if the Fed gives a clear hawkish or dovish bias, there is likely to be a trading opportunity.

If the Fed is hawkish, we will look to buy USD. A hawkish tone will likely see the Fed suggest that four hikes are now more likely than three.

This could see USD strengthen not only in the short-term but the medium to long-term too. If the Fed is dovish and suggests three hikes this year, we will look to sell USD.

This would likely result from the Fed expressing any concern over inflation.

Thursday 3rd May

UK Services PMI

UK Services PMI is the most important of the three UK PMI releases.

This is because the UK’s Services sector makes up almost 80% of the UK’s GDP according to the ONS.

As is the case with Manufacturing and Construction, a print above 50 suggests expansion and below 50 suggest contraction.

The best trading opportunity will be if all three PMI’s print positive or if all three print negative.

Given GBP’s current bearish tone, a GBP short could be a great trade if all PMI’s disappoint. If all PMI’s are positive, GBP could see a reprieve from its current bearish tone.

Even if this is the case though, we would argue GBP will become more neutral than bullish. Finally, if all PMI’s print as expected, the bias will likely continue to be to the downside.

US Unemployment Rate

This is the final market moving event of the week. The US employment report consists of three key data points.

These are Non-Farm Payrolls, the Unemployment Rate and Average Hourly Earnings. The initial reaction will likely result from any deviation in NFP.

Although the initial reaction often results from NFP, this is not the most important of the three.

This is because inflation is currently a greater concern than employment.

The US labour market is by all accounts in good condition while inflation remains a concern for the Fed.

This was very clear in Fed Chair Powell’s inaugural speech where he stated:

the labor market has been strong, and my colleagues and I on the Federal Open Market Committee expect it to remain strong.‘ 

While doubts over inflation were clear in the Fed’s March Meeting.

For this reason, as an underlying measure of inflation, Average Hourly Earnings is the most important data point.

Everything Could Change

Of course, as this data will follow Wednesday’s FOMC meeting, circumstances could change.

For example, if the Fed express additional concern over inflation, Average Hourly Earnings will be even more important.

However, if they express increasing concerns over employment, NFP and the Unemployment Rate could become more important.

For this reason, the first task in preparing to trade US employment will be to analyse the Fed’s May statement.

There are two particular approaches that you could take to trade US employment.

The first approach would be to hold any trade off of FOMC into Friday. The second approach would be to trade out of the employment report.

When trading out of the employment report, the idea will be to look for a clear bias based on the data deviating.

Any significant deviation could be market moving; however, for the highest conviction opportunity, all three data points should deviate in the same direction.

If the data prints mixed or there are no significant deviations, there will unlikely be any clear opportunity.

Summary

In conclusion, the overall focus this week will likely revolve around USD and US Yields. FOMC, in particular, will be Key towards USD’s fundamental and short-term outlook.

Beyond USD, if UK data continues to disappoint, GBP is likely to remain pressured. All of these events could provide opportunities to trade post-release.

However, it may be worth considering shorting GBP into the UK PMI releases. Especially Services PMI if Manufacturing and Construction disappoint.

A strong hawkish or dovish tone from the RBA or a significant deviation from New Zealand’s data could also make for some great trades.

The overall goal of this article is to help you improve your understanding and ability to trade risk events.

If you would like to learn more about another feature of risk event trading, please type your question in the comments below.

 

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