Weekly Outlook: 2016, January 24 - 31

Week Ahead by Crédit Agricole: FOMC, BoJ, RBNZ, Buy USD, Sell JPY & Commodity FX

• "Risk sentiment by the end of the week has stabilised, mainly in reaction to ECB President Draghi making a case of considering additional policy action as soon as March. Even if China-related growth uncertainty is likely to keep cross market volatilities high, further stabilising conditions cannot be excluded in the short-term. This is especially true as a relatively empty Chinese economic data calendar is keeping investors focused on developed markets next week."
• "Elsewhere, it will be about the Fed to drive markets further. Considering already decreased central bank monetary policy expectations since the start of the year, we see limited room of the Fed surprising on the dovish side. As such we stick to the view that the greenback should be bought on dips, versus the franc for instance. It must be noted too that a less dovish than anticipated rhetoric may not dependently dampen risk sentiment, as it may be taken as a signal of confidence."
• "When It comes to commodity currencies, we remain of the view that rallies should be sold. This is especially true as central banks such as the RBNZ may reiterate a more dovish policy stance, especially after the most recent inflation data surprised lower."
• "Last but not least we increased our JPY forecast profile, mainly due to more elevated than anticipated risk aversion and as our economists see little scope of the BoJ turning more aggressive ahead of the April meeting. However, we remain of the view that the currency should gradually trend lower."

• USD – 'Given already low Fed rate expectations, we see little scope of the Fed surprising on the dovish side. We remain USD buyers on dips.'
• JPY – 'The BoJ is unlikely to surprise next week, especially as central bank Governor Kuroda reiterated this week that inflation will gradually trend higher.'
• NZD – 'Even if the RBNZ were to keep monetary policy unchanged, a more dovish rhetoric should keep currency downside risks intact.'

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Market mood before it became better in a very busy week. Will the Fed and the BOJ go dovish? Apart from these rate decisions, we have GDP data from the US and the UK as well as other key releases.

1. German Ifo Business Climate: Monday, 9:00. German business sentiment declined slightly in December, falling to 108.7 compared to 109 posted in November going below analysts’ predictions of 109.2. The current conditions section reached 112.8, lower than the 113.4 points booked in November amid weakness in external conditions. The outlook index remained unchanged at 104.7, a bit lower than the 105 estimated by economists. However, the German economy continued to grow in the third quarter amid robust domestic consumption, while the ongoing immigration wave also provided a little boost. Business climate is expected to decline further to 108.5 this time.
2. Draghi speaks: Monday, 18:00. ECB President Mario Draghi will speak in Frankfurt. He may speak about the ECB decision to see a darker picture and may reveal clues about the chances for a change in the monetary policy at the next meeting in March. Market volatility is expected. His words impact not only the euro, but as we’ve seen, the whole market.
3. Carney speaks: Tuesday, 10:45. BOE Governor Mark Carney will speak in London about the Financial Stability Report. He may explain his objection to raise interest rates despite the Federal reserve move on December 2015. Market volatility is expected. Any mention about the EU referendum and its implications could also move markets.
4. US CB Consumer Confidence: Tuesday, 15:00. American consumer confidence rose in December amid improving labor market conditions. The index increased to 96.5 in from 92.6 in the previous month, beating expectations for a 93.9 reading. Both present conditions and the 6- month outlook improved. The US economy expanded 2% in the third quarter, also expecting a similar reading for the final quarter. Job growth averaged 210,000 in 2015 pushing the jobless rate down to 5% in November. Consumer confidence is forecasted to reach 96.6 in Janyary.
5. Australia inflation data: Wednesday, 0:30. Australian inflation increased 0.5% in the third quarter of 2015, lower than the 0.7% rise predicted by analysts. The lower than expected rate was one of the main reasons for the rate cut in December. The weak inflation data “was broad-based, except for housing-related items. The weakening in underlying inflation may lead to further cuts in the near future. Consumer prices are expected to rise 0.3% this time. This is key to the RBA decision in the following week, and will be watched by other central banks.
6. US rate decision: Wednesday, 19:00. The Federal Reserve took the plunge and raised its key interest rate from a range of 0% to 0.25% to a range of 0.25% to 0.5% on its December meeting. The raise affected investors, home buyers and savers. The increase was widely anticipated as the US economy continued to improve making a full recovery from the Great Recession. The Fed noted that future rate hikes will be gradual to avoid killing the economic recovery. No change is expected now and also the implied probability for a move in March looks slim. The big question is: will the Fed acknowledge the recent weakness and hint on a hiatus in rate hikes, joining the other dovish central banks.
7. NZ rate decision: Wednesday, 21:45. The central bank of New Zealand cut its benchmark rate for the fourth time since June 2015 on its December meeting, unwinding former increases. Reserve Bank governor Graeme Wheeler noted that the economy weakened due to lower diary prices and rising unemployment following a surge in the number of immigrants. Inflation remained below the Bank’s target of 1%-3%, but Wheeler expects export prices to strengthen in 2016 raising inflation to the middle target range.
8. UK GDP data: Thursday, 9:30. The UK economy eased its expansion rate to 0.4% in the third quarter according to the final read. The Service sector gave its best performance in nearly a year with growth of 0.7%. Construction output fell by more than 2% while industry contracted for a third consecutive quarter. The mild increase suggests the BoE will not be in a hurry to raise rates any time soon. However some economists claim the slowdown in the third quarter is not enough to hamper rate hikes in mid-2016. Economists expect GDP to rise 0.5% in the fourth quarter of 2015.
9. US Durable Goods Orders: Thursday, 13:30. Orders for long lasting factory goods remained unchanged in November. Economists expected orders would decline 0.6%. Business investment plans fell in November. The strong dollar continued to weigh on manufacturing and spending cuts in the energy sector showed little sign of abating. Meanwhile core orders excluding transportation items declined 0.1% while expected to rise 0.1% in November. Durable Goods Orders is predicted to decline 0.7% in December, while Core orders are expected to remain flat.
10. US Unemployment claims: Thursday, 13:30. The number of Americans filing for unemployment benefits increased to 293,000 last week, suggesting a setback in the labor market amid economic slowdown and major stock market selloff. The 10,000 rise was contrary to analysts’ expectations, predicting a drop to 279,000. Although layoffs have picked up in recent weeks, it does not necessarily suggest a downward trend but might be attributed to seasonally adjustments. The four-week moving average of claims increased 6,500 to 285,000 last week. The number of new claims is expected to reach 281,000 this week.
11. Japan rate decision: Friday. The Bank of Japan maintained its monetary stimulus target in December but decided on operational changes for its purchases of government bonds, exchange-traded funds and real estate investment trusts. Governor Haruhiko Kurodasaid the changes were designed to make it easier for the BOJ to maintain the current policy and didn’t constitute additional easing. However, Kuroda reaffirmed that he wouldn’t hesitate to adjust monetary policy if needed. The Japanese currency has lost about 30% of its value against the dollar despite calls for companies increase their investments. Recent hints from both the central bank and the government talked about more stimulus. Japan certainly does not like the strength of the yen against the dollar, the yuan and even the euro.
12. Canadian GDP data: Friday, 13:30. Canada’s economic output remained unchanged in October after contracting 0.5% in September. Mining, quarrying, oil and gas extraction expanded as well as the public sector, while manufacturing, utilities and retail trade offset this expansion, suggesting the Canadian economy weakened in 2015. Economists forecasted an expansion of 0.2%. Analysts also expect flat growth in the fourth quarter.
13. US GDP data: Friday, 13:30. U.S. economy expanded at a pace of 2% annually according to the final read for Q3. Businesses gained $56.8 billion worth of inventory in the third quarter, the smallest since the first quarter of 2014 and down sharply from $113.5 billion in the April-June period. Consumer spending, which accounts for more than two-thirds of U.S. economic activity, grew at a 3.2% after expanding at a 3.6% in the second quarter indicating solid domestic demand. Analysts expect GDP to reach 0.8% in the fourth quarter. It is important to note that the Fed may already have the data before we do.

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Bank of America Merrill Lynch: Draghi boosts sentiment

"Risk assets should outperform over the next 6 weeks as markets realize they may have overreacted in December. Still, the risk is that too much focus on the next meeting may lead to possible disappointment once again and continued volatility."

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