Two weeks ago, the Bank of Japan intervened in the fx market and bought Yen, which drove the price of JPY pairs lower. Last week, the Bank of England took its turn and intervened in the Gilt market, earmarking 65 Billion Pounds to buy longer dated Gilts through October 14th. This week, both the RBA and the RBNZ meet to discuss interest rate policy. With the interventions over the last week, will either central bank be the first ones to pivot and decide not to hike rates at all? In addition, OPEC+ meets this week to decide what it should do about the supply of crude oil. Will they cut supply after aggressive increases over the last year? Also, will Non-Farm Payroll data this week confirm the Fed’s bullish views, or could a bad number cause them to pause their rate hike cycle?
Central Bank intervention
The Bank of Japan stepped into the FX market and bought Yen as the value was plummeting. USD/JPY was trading near 145.90 when the BOJ entered the market and it bought between $21-$25 billion worth of Yen. This sent USD/JPY lower to an intraday low of 140.35. However, the pair quickly retraced the move and is currently trading just below the 145.00 area, as fears stir that the BOJ may enter again near these levels. Last week, the Bank of England intervened in the bond market and committed to buying 65 billion Pounds worth of bonds with 20+ year maturities in order to bring down yields at the long end of the curve. This was after PM Liz Truss attempted economic suicide with a tax reduction “mini-budget”. The Gilt markets almost collapsed, but the BOE was there to save the day. At the most recent BOE meeting, the MPC said that it would begin to sell its portfolio of Government bonds to the tune of 80 billion Pounds per year. This got pushed back to October 31st. Traders are now wondering which central bank could intervene next. The PBOC put its state-owned banks on warning that it could intervene and buy Yuan, however China is on holiday next week and is unlikely to intervene during closed markets. The BOJ could very well intervene again if the Yen continues to drop in value. The RBA and RBNZ meet next week. Perhaps they may not necessarily intervene, however either could “pivot” and slow the pace of interest rate increases. Traders need to stay on their toes and manage risk accordingly next week.
The RBA and the RBNZ both meet next week to discuss interest rate policy. The market is split as to whether the RBA will hike rates by 25bps or 50bps, after 3 consecutive rate hikes of 50bps. At its last meeting, the RBA signaled that it expects to increase interest rates in the months ahead, but it is not on a pre-set course. Global inflation has been high, and Australia’s jobs data and manufacturing data has been strong. In addition, the Australia Dollar has been weakening and AUD/USD is near its lowest level since the pandemic. This should set the table for a 50bps high to bring the cash rate to 2.85%. However, on September 16th, RBA Governor Lowe said that at some point, the RBA will not need to hike 50bps, and they are getting close to that point. Therefore, the RBA may be inclined to only hike 25bps.
The RBNZ hiked rates the official cash rate by 50bps when it last met in August, to bring the key rate to 3.0%. This was the fourth 50bps rate hike in a row. The RBNZ also said that it expects to increase rates going forward, peaking at 4.1% in March 2023, in order to bring inflation back to target. Last week, RBNZ Governor Orr said that although the rate hike cycle is well advanced, further tightening is likely required. Expectations are for another 50bps increase at the meeting this week as NZD/USD approaches the pandemic low. This would bring the cash rate to 3.5%.
OPEC and its partners meet this week to decide what it should do about the supply of oil. WTI Crude has been extremely volatile over the last few months, trading from $123 in June down to $76.50 last week. “Sources” are saying that in order to stop the volatility of oil prices, OPEC+ will cut output by 500,000 to 1,000,000 bpd. Note that actual production by many counties is already behind its quotas, so a small reduction in output should be negligible to the overall price. Brent Crude oil is currently trading below $86.00.
The beginning of Q3 brings with it a new round of earnings reports. However, it is still too early in the quarter to bring the big names. That begins next week with bank earnings. This week, we will hear from such names at Tilray, Tesco, and Wetherspoons. For a complete look at this week’s earnings, see my colleague Josh Warner’s preview here.
Beginning of the month means beginning of the month data, the most anticipated event being the US Non-Farm Payroll data to be released on Friday. Expectations are for the US economy to have added 250,000 jobs in September, after adding 308,000 jobs in August. The Fed would be very content if the print is in line with expectations, as it will have more confidence when raising rates. Additional data this week include final Global PMIs and US ISM PMI data on Monday and Canada’s Employment Change on Friday. Other important economic data to be released this week is as follows:
- Global: Global Manufacturing PMI Finals (SEP)
- Japan: Tankan Large Manufacturers Index (Q3)
- Japan: BOJ Summary of Opinions
- UK: Nationwide Housing Prices (SEP)
- US: ISM Manufacturing PMI (SEP)
- US: Construction Spending (AUG)
- New Zealand: NZIER Business Confidence (Q3)
- Japan: Tokyo CPI (SEP)
- Australia: Building Permits (AUG)
- Australia: RBA Interest Rate Decision
- EU: PPI (AUG)
- US: Factory Orders (AUG)
- OPEC+ Meeting
- Global: Global Services PMI Finals (SEP)
- Australia: Retail Sales Final (AUG)
- Australia: RBA Chart Pack
- New Zealand: RBNZ Interest Rate Decision
- Germany: Trade Balance: (AUG)
- US: ADP Employment Change (SEP)
- Canada: Trade Balance (AUG)
- US: Trade Balance (AUG)
- US: ISM Non-Manufacturing PMI (SEP)
- Crude Inventories
- Australia: Trade Balance (AUG)
- Germany: Factory Orders (AUG)
- EU: Global Construction PMI (SEP)
- EU: Retail Sales (AUG)
- Canada: Ivey PMI s.a. (SEP)
- Japan: Household Spending (AUG)
- Australia: RBA Financial Stability Review
- Germany: Industrial Production (AUG)
- UK: Halifax House Price Index (SEP)
- Mexico: CPI (SEP)
- Canada: Employment Change (SEP)
- US: Non-Farm Payrolls (SEP)
Chart of the Week: 240-minute GBP/USD
Source: Tradingview, Stone X
GBP/USD has been volatile over the last few weeks, to say the least. On September 13th, the pair was trading near 1.1700. Less than two weeks later, GBP/USD made a low of 1.0357, the lowest the Pound has ever traded vs the US Dollar! The previous low was 1.0520, set in 1985. Since then. GBP/USD has bounced to the 61.8% Fibonacci retracement from the September 13th highs to the September 26th lows, near 1.1235. This level is also horizontal resistance and the bottom of a downward sloping channel the pair had recently broken below, dating to May. If the pair continues higher from here, horizontal resistance sits at 1.1383 and then 1.1590. Above there, price can move the September 13th highs at 1.1738. However, if the current resistance holds and price moves lower, the first support is at Friday’s low of 1.1035. Below there, GBP/USD can fall to horizontal support at 1.0931 and then the previous all-time lows at 1.0520.
Markets will be waiting on pin and needles this week to see which central bank may be the next to intervene. While they sit and wait, they will get to see the RBA and RBNZ make their respective decisions regarding rate hikes. In addition. OPEC+ will have its monthly meeting to decide what to do about output and the US will release Non-Farm Payrolls for September. Sit tight….it could be another exciting week!
Have a great weekend!
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