FX Week Ahead – Top 5 Events: Australia CPI; BOC, BOJ, ECB Rate Decisions; US GDP

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FX Week Ahead Overview:

  • While a notable deceleration is anticipated, the Reserve Bank of Australia’s target range is +1-3%, suggesting that price pressures will be above the upper band, which could help the Australian Dollar.
  • It seems likely that the Bank of Canada will soon restart its stimulus withdrawal efforts when it meets later this week
  • It’s a near-guarantee that the Federal Reserve will announce a taper to its asset purchases when it meets in November. However, with growth slowing, the market may be too aggressive in rate hike timing and pricing, which suggests five hikes through the end of 2023.

For the full week ahead, please visit the DailyFX Economic Calendar.

10/27 WEDNESDAY | 00:30 GMT | AUD INFLATION RATE (3Q)

According to a Bloomberg News survey, 3Q’21 Australia inflation rates (CPI) increased by +0.8% after gaining +0.8% (q/q) last quarter, and by +3.1% from +3.8% (y/y). While a notable deceleration is anticipated, the Reserve Bank of Australia’s target range is +1-3%, suggesting that price pressures will be above the upper band. Although the RBA has embraced a ‘lower for longer’ policy – reducing QE but keeping QE going until February 2022 – pressure may build for a reduction in stimulus if headline Australia inflation stays above the upper band of the RBA’s target range.

10/27 WEDNESDAY | 14:00 GMT | CAD Bank of Canada Rate Decision

Nearly a month removed from the Canadian federal election has passed, and with inflation continuing to run above expectations, it seems likely that the Bank of Canada will soon restart its stimulus withdrawal efforts when it meets later this week. Currently, asset purchases are running at a rate of C$2 billion per week. Following the superb September Canadian jobs data and surging energy prices– energy accounts for approximately 11% of Canadian GDP – there is reason to believe there is less slack in the economy than anticipated mid-year.

10/28 THURSDAY | 03:00 GMT | JPY Bank of Japan Rate Decision

The Bank of Japan’s policy meeting is much ado about nothing: with year-over-year inflation running at +0.2% in September, there is no reason to believe that the Japanese central bank will abandon ultra-accommodative policies anytime soon. The BOJ will remain the world’s most dovish central bank.

10/28 THURSDAY | 11:45 GMT | EUR European Central Bank Rate Decision

The European Central Bank is sending up signal flares that its ultra-accommodative policies will remain in place for the foreseeable future. It remains likely that the ECB will seek to begin a new QE program after the PEPP ended, with ECB Chief Economist Philip Lane suggesting the ‘lower for longer’ mindset is entrenched. Overnight index swaps suggest that the ECB will keep rates at their current level over the next 12-months, with less than a 20% chance of a move in either direction.

10/28 THURSDAY | 12:30 GMT | USD Gross Domestic Product (3Q)

Warranted or not, stagflation fears will likely tick higher this week as 3Q’21 US GDP slumps, perhaps below +1% annualized (consensus forecast: +2.3%; Atlanta Fed GDPNow: +0.5%), while the Fed’s preferred measure of inflation, the PCE Index, shows price pressures north of +4%.

It’s a near-guarantee that the Federal Reserve will announce a taper to its asset purchases when it meets in November. However, with growth slowing, the market may be too aggressive in rate hike timing and pricing, which suggests five hikes through the end of 2023. A pullback in Fed rate hike odds over the coming weeks could set the stage for a weaker US Dollar, which has tracked the 2s5s10s butterfly and Eurodollar spreads closely over the past few months.

— Written by Christopher Vecchio, CFA, Senior Strategist

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