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FX Week Ahead: ECB And BOJ Meet As Policies Set To Diverge

FX Week Ahead: ECB And BOJ Meet As Policies Set To Diverge

The European Central Bank and the Bank of Japan policy meetings next week will likely steal investors’ attention as one prepares the ground for tighter policy while the other looks in no hurry to alter course. It will also be an important week for data as China releases first quarter GDP growth figures and inflation numbers come into focus in Canada, New Zealand and the UK.

Aussie jobs and New Zealand inflation data to be watchedThe Australian and New Zealand dollars achieved fresh multi-month highs against their US counterpart this week despite a consensus that their country’s central banks are likely to stay on hold for some time. Data released next week is unlikely to change the outlook for the two economies but could weaken the current positive bias for the antipodean currencies if they underwhelm.

But before the data, the RBA’s minutes of the July policy meeting will be watched by investors on Tuesday. The minutes should give more clues on how deep the Reserve Bank of Australia’s growth concerns run following its less confident outlook at the last meeting. The jobs data will follow on Thursday and is expected to show the unemployment rate ticking up slightly to 5.6%, though employment is forecast to rise by a descent 15k in June.

Meanwhile, in New Zealand, inflation is expected to dip slightly from 2.2% year-on-year to 1.9% in the second quarter. This would still be within the Reserve Bank of New Zealand’s 1-3% target band so core inflation readings will be watched more carefully to assess the likelihood of the RBNZ raising rates sooner than expected.

China’s economy to cool slightly in Q2China will be the first major country to publish GDP readings for the second quarter of 2017 on Monday. Growth in the world’s second largest economy is expected to slow marginally from 6.9% y/y to 6.8% in the three months to June. A weaker reading would have a negative impact on global risk sentiment, but overall, all the indications are that the Chinese economy is gradually adjusting to a steadier pace of growth as it undergoes structural reforms. In addition to the GDP data, other key indicators are also due on Monday, comprising industrial output, urban investment, retail sales and house prices figures for June.

Bank of Japan to stand pat even as growth acceleratesJapanese trade data out on Wednesday is expected to show exports continuing to recover, growing by 9.5% annually in June. This would make it the seventh straight month of positive growth for the country’s exporters, and imports are also forecast to rise strongly. The improving outlook for the economy will likely be reflected by the Bank of Japan’s latest forecasts on Thursday when it concludes its two-day monetary policy meeting. The BoJ is expected to revise up its forecasts for growth, but lower them for inflation. The strengthening recovery has yet to translate to higher consumer prices in Japan and the Bank is widely expected to hold policy unchanged next week. The yen is not expected to see much reaction from the BoJ’s latest outlook report as any growth optimism will likely be offset by downbeat inflation forecasts.

ECB to hold policy unchanged but language to be watchedThe ECB meets for its latest policy meeting on Wednesday and Thursday, and with most economists expecting the next big announcement in September, the July meeting could be an uneventful one. However, further minor tweaks to the ECB’s forward guidance should not be ruled out next week, while President Mario Draghi could use his press conference to signal tapering discussions at the September meeting. The Eurozone is in a similar position to Japan where growth is picking up but inflationary pressures remain elusive, except that headline inflation in the euro area has made significantly more progress in moving towards the ECB’s target than it has in Japan. This means that, unlike the BoJ, the ECB needs to soon start planning how it will gradually withdraw its massive monetary stimulus. Speculation of ECB tapering has already helped the euro power ahead to 14-month highs against the dollar, prompting ECB officials to choose their words carefully.

Also to watch out of the Eurozone next week are the final CPI readings for June on Monday and the German ZEW business survey on Tuesday.

UK inflation and retail sales data could be key to BoE’s next moveThe Bank of England recently joined the Bank of Canada and the ECB in shifting its stance to a more hawkish one, giving the pound a bump upwards even as recent economic indicators disappoint. Incoming data continue to raise questions about the strength of the British economy as both consumer and business confidence appear to be waning, with consumers being hit by a fall in real incomes and businesses holding back their spending plans due to the Brexit uncertainty. Next week’s data on inflation and retail sales will therefore be eagerly awaited by investors for more clarity on the state of the UK economy to help them assess the possibility of a near-term rate hike by the Bank of England. CPI data is due on Tuesday and is expected to show annual inflation remaining unchanged at a 4-year high of 2.9% in June, while core CPI is forecast to stay unchanged at 2.6%. Retail sales will follow on Thursday and should bring some relief, with sales forecast to rise by 2.6% y/y in June, up from 0.9% in the prior month.

US to take a backseat but Canadian data could signal further rate hikesThe US will step out of the limelight as the Fed’s blackout period begins ahead of the July 25-26 FOMC meeting, while US data will also be scarce. The only major numbers to watch will be building permits and housing starts on Wednesday, and the Philly Fed manufacturing index on Thursday.

After this week’s hike in rates by the BoC, Canada will remain in the spotlight as important data on inflation and retail sales are released (both on Friday). Canadian inflation unexpectedly fell to 1.3% y/y in May and is forecast to decline to 1.1% in June. Although the BoC has already stressed that it sees CPI rising over the coming months, a prolonged weakness could lessen the odds of another rate hike this year, which is expected in October. Meanwhile, retail sales figures for June should show whether the robust consumer spending levels are being sustained.

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