FX Week Ahead Overview:
- The first full week of October promises several significant data releases and events over the next few days, including the September US NFP report on Friday.
- Two rate decisions are in focus over the week, with the Reserve Bank of Australia meeting on Tuesday and the Reserve Bank of New Zealand meeting on Wednesday.
- The North American economies are in focus, aside from the US: the September Mexican inflation rate and the September Canadian jobs report are due.
For the full week ahead, please visit the DailyFX Economic Calendar.
10/05 TUESDAY | 03:30 GMT | AUD Reserve Bank of Australia Rate Decision
In early-September, there was a 29% chance of a 25-bps rate cut through December 2021. Even as Australian vaccination rates continue to rise, the ongoing pressure in commodity markets has neutralized any previous gains in rate hike expectations – however minor – over the course of the month. Now at the start of October, according to Australia overnight index swaps, there is a 28% chance of a 25-bps rate hike through the end of the year – an insignificant change.
RESERVE BANK OF AUSTRALIA INTEREST RATE EXPECTATIONS (October 4, 2021) (TABLE 1)
Nevertheless, the RBA had previously pledged that it would keep rates at their current level or lower for three years starting in March 2020, and with record levels of Australian Dollar shorts in the futures market, it may only take a small change in market conditions – either an improved trade relationship with China, a reduction in pressure in base metals, or the end of lockdowns – that could provoke a violent repricing in Australian rate odds, which could lead to a considerable short covering rally by the Aussie.
10/06 WEDNESDAY | 01:00 GMT | NZD Reserve Bank of New Zealand Rate Decision
Recall in mid-August, after New Zealand entered a “level four lockdown”, rate hike odds plummeted for the Reserve Bank of New Zealand meeting set to convene the following day; the RBNZ ultimately did not hike rates. But soon after, markets were expecting the first 25-bps rate hike to arrive in October as it appeared that COVID-19 infections were slowing. Yet over the past week, with data emerging that New Zealand COVID-19 infections jumped to their highest level since June, markets are quickly downgrading their expectations that the RBNZ will raise rates when it meets in the coming days.
RESERVE BANK OF NEW ZEALAND INTEREST RATE EXPECTATIONS (October 4, 2021) (Table 2)
According to overnight index swaps for New Zealand, there is an 81% chance of a 25-bps rate hike when the RBNZ meets on Wednesday. That is still heavily favoring a rate hike, but it is a meaningful pullback from the 100% odds that existed in late-September. Markets remain adamant that a rate move will arrive by the end of the year, with New Zealand overnight index swaps pricing in a 190% chance of a 25-bps hike by the end of the year; that is, a 100% chance of a 25-bps rate hike and a 90% chance of 50-bps worth of hikes.
10/07 THURSDAY | 11:00 GMT | MXN Inflation Rate (SEP)
According to a Bloomberg News survey, the September Mexican inflation rate (CPI) is expected to show a jump deceleration to +5.99% from +5.59% (y/y). Even as the base effect period around the start of the pandemic fades into the background, elevated inflation readings could keep back Banxico’s dovish tendencies. In fact, at the start of the week, Deputy Governor Jonathan Heath said that “the cycle of hikes is not over yet, that perhaps we’re not too far from the end…we should still maybe see one or two more (rate) hikes.”
10/08 FRIDAY | 12:30 GMT | CAD Employment Change & Unemployment Rate (SEP)
Following two blistering hot jobs reports in July and August, the Canadian labor market will show further signs of moderation in September. According to a Bloomberg News survey, consensus forecasts are looking for a still-solid reading of +65K, which would ultimately reduce the unemployment rate from 7.1% to 6.9%. The Canadian Dollar, which is starting to see gains accumulate on the back of stronger oil prices, could use the help amid otherwise bearish seasonal backdrop.
10/08 FRIDAY | 12:30 GMT | USD NONFARM PAYROLLS & UNEMPLOYMENT RATE (SEP)
The main issue for the US Dollar when it comes to the September US Nonfarm Payrolls report is whether or not the US labor market regained its momentum after a surprisingly weak August reading that came in at +235K (versus expectations closer to +650K).According to a Bloomberg News survey, forecasters are looking for jobs growth of +488K while the unemployment rate (U3) is anticipated to drop from 5.2% to 5.1%. Meanwhile, the US labor force participation rate is due in at a still-meager 61.7%.
Atlanta Fed Jobs Calculator (September 2021) (Chart 1)
Even if the September US NFP number is off of its summer highs, the US economy has made enough improvement in recent months to require less significant jobs growth before the US reaches ‘full employment’ as experienced pre-pandemic.
According to the Atlanta Fed Jobs Growth Calculator, the US economy needs +435K jobs growth per month over the next 12-months in order to return to the pre-pandemic US labor market of a 3.5% unemployment rate (U3) with a 63.4% labor force participation rate.
Put simply, if the September US NFP meets expectations, it will be a strong indication that the Federal Reserve will feel comfortable announcing a taper to its asset purchase program when it meets next in November.
— Written by Christopher Vecchio, CFA, Senior Strategist