FXStreet (Bali) – This week will see a reduction in geopolitical-led volatility activity compared to last few weeks following the Greek bailout deal, notes David Fritz, FX Strategist at Nomura, adding that the main focus for this week is now shifted to diverging monetary policies and the RBNZ cash rate decision.
Key Quotes
“This week will be a light data week, and geopolitical events are likely to be more muted than they have been in recent weeks. The most interesting release might be on the antipode, with the RBNZ announcing its cash rate decision. Nomura and the market both expect a cut of 25bp. The decline in the terms of trade, mainly driven by falling dairy prices, is likely to slow the economy and dampen inflation.”
“Given the worsening outlook and the dovish language at the previous meeting, we expect the RBNZ to cut at the upcoming meeting and then one more time before the end of the year. The question might be whether the RBNZ is more aggressive at this meeting, taking out “insurance” against further deterioration in GDP growth and inflation with a 50bp cut. We consider this unlikely, as the RBNZ would not want to panic markets, but this is something to be mindful of all the same.”
“Three central banks release the minutes from their most recent policy meetings. The BOJ and RBA lead off on Tuesday, followed by the BOE on Wednesday. All three left their rates unchanged. For Australia, due to deteriorating fundamentals, we expect another reduction in the cash rate in November, but it is perhaps a little too early to start seeing a leaning in this direction, as the RBA statement did not have an explicit easing bias. Extra interest may be paid to the BoE’s minutes after a “more hawkish than expected” speech last week by David Miles. This speech caused markets to reprice expectations of a rate hike to an earlier period. On the back of this, and general GBP outperformance, we recommended taking profits on GBP long exposure.”
“The data release schedule for this week is sparse. The UK release of retail sales could pique interest, given the markets extra focus on the BOE at the moment. Our UK economist expects retail sales to come in below market expectations, so there is potential for disappointment and GBP underperformance. This is another rationale for taking profits on the GBP long trades. Canada releases retail sales data, and after the BOC cut the past week due to poor economic performance, additional attention could be paid to this number as well.”
“In Europe, we get the preliminary PMI estimates for France, Germany, and the Eurozone for July on Friday. The weakness of the prior month’s PMIs at the sub-component level suggests little reason to expect further improvement. This would be consistent with GDP growth of 0.4% q-o-q, in line with our expectation for Q2. In June, data showed that the business cycle in the Eurozone had entered a slowdown phase for the first time in eight months, and with risks from macroeconomic uncertainty around Greece, it will be interesting to monitor growth indicators in the Eurozone.”
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