Market Overview

Why This Will Be A Central Bank Intensive Week

  • Central banks will dominate the spotlight this week as there will be rate announcements from Australia, Canada, United Kingdom and Europe to finish on Friday with the release of the U.S. non-farm payroll report.
  • Over the weekend the Swiss gold referendum was rejected and will mandate the central bank to increase its reserves immediate with brings relief to policy makers as the EUR/CHF floor becomes more manageable. The Chinese PMI numbers came in below expectations and will increase the pressure on the People's Bank of China to further stimulate the economy to avoid further slowdown. The effects of the events on the weekend will get the ball rolling in a week filled with major announcements and economic releases that will increase volatility across the FX market.

There are no rate changes expected as most of the policy makers have expressed a lower for longer message at different turns. The European Central Bank (ECB) is facing the most pressure after its governor Mario Draghi continues to ask European Union members to grant him the ability to launch a full on quantitative easing program. The major opponent to that stimulus alternative is Germany as it is against the buying of sovereign bonds by the central bank. That being said there is still some analysts that expect the ECB to step up to adversity and launch a program but it is unclear how it could work without the German's blessing.

Gold Vote Losses Luster

The “Save our Swiss Gold” campaign could only sway about a quarter of Swiss voters this weekend. Earlier polls had hinted about the strong possibility the Swiss National Bank (SNB) would not have to repatriate gold holdings around the world and engage in a buying spree that would have pushed the price of the metal upwards. The uncertainty was still high even with polls favouring the outcome preferred by the central bank. When the results came in both the commodity and the currency dropped versus the dollar as the SNB would not be forced to more than double reserves. The EUR/CHF 1.20 is easier to defend without the added complexity of increasing gold reserves to 20%.

Gold fell as the referendum vote was one of the few events driving the price up in the last month. Lower demand for commodities as well as a lack of appetite in the metal as a safe haven and inflation hedge has seen gold touch four year lows. The precious metal continues to trade around $1,148.

RBA Lower for Longer Rate Decision

Reserve Bank of Australia (RBA) governor Glen Stevens said in a speech two weeks ago that interest rates will be low for years to come. The current Australian benchmark rate is 2.5% and it is not expected to change this week when the RBA publishes its policy statement. A weaker AUD could benefit the economy as it copes with the effects of a Chinese manufacturing slowdown.

ECB Rate Decision: Whatever it takes but What can Draghi do?

Last week a Credit Suisse (CS) analyst issued a call that the European Central Bank (ECB) will announce full on quantitative easing (QE) during their December 4 meeting. The current market consensus is on the ECB governor to fire more pleas to European Union members to follow through with policy reforms and maybe single out Germany to ease off the austerity which is preventing sovereign bonds to be purchased by the central bank.

Even though there are some analysts forecasting a surprise announcement and after Japan and China last week it is understandable in this case the ECB does not have the independence that the Asian central banks have. For all the escalating rhetoric from Mario Draghi, German chancellor Angela Merkel and Bundesbank Governor Jens Weidmann have been firm on sovereign bonds not needed or wanted to spur growth and avoid deflation in the EU.

The economies of France and Italy continue to have budget issues and have been given a reprieve until next spring but there is little expectations that reforms will come in time and more pressure piles on the ECB to unlock the German QE negative stance.

BoC and BoE No Surprises as Held Rates are Expected

The Bank of Canada Governor Stephen Poloz has pledged the central bank is ready to adjust to whatever headwinds threaten the Canadian economy even suggesting a rate cut could be implemented. Canadian fundamentals continue to be mixed, but the most likely scenario is a rate hike next year following the lead of the U.S. Federal Reserve. The drop in commodities has taken a toll on the CAD, but a strong U.S. recovery would be beneficial for its northern neighbour.

The Bank of England at one point in the fall was the most likely major central bank to issue a rate hike but things have turned “gloomier” for the U.K. quoting Chief Economist Haldane. Exports continue to struggle and most of the strength continues to be all internal consumption which could turn rather quickly specially if house prices drop. That is the reason the BoE has been so diligent in trying to stabilize rising house prices with only moderate success.

Non-farm Payrolls Could Boost Fed Rate Hike Schedule

October's payroll numbers came in slightly below expectations but there was an improvement in the unemployment rate to 5.8% which is the lowest in four and half years. November might prove along the same lines on the headline number with a forecasted 225,000 new jobs. The gain might still be above 200,000 but it would be unexpected to beat expectations given the less optimistic Conference Board survey results on job availability.

The November and December figures can still impress the market and boost the case for the Fed to start their rate hike cycle next year. The original schedule as naively announced by chair Yellen in her first press conference was to raise the benchmark rate about six months after the end of QE. The six months will place it around Spring of 2015.

The preceding article is from one of our external contributors. It does not represent the opinion of Benzinga and has not been edited.

Posted-In: Markets


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