Week Ahead – Bank of Canada ponders raising rates again; Aussie eyes jobs data and China GDP


Raffi Boyadjian, XM Investment Research Desk

The Canadian and Australian dollars will be in focus next week as the Bank of Canada holds its first monetary policy meeting of the year, while Australian employment and Chinese growth figures will test the aussie’s recent bull run. Other highlights will include inflation data out of the UK and the Eurozone. But the US will see a quieter week in terms of economic releases.

China’s economy likely slowed in Q4

China will be the first major economy to report fourth quarter growth data when it publishes its GDP numbers on Thursday. After growing by 6.9% year-on-year in the first half of 2017 and 6.8% in the third quarter, China’s growth rate is expected to moderate slightly to 6.7% in the final three months of the year, giving a full year figure of 6.8%. China’s Premier, Li Keqiang, said this week it expects growth of 6.9%. But a weaker growth is possible too given that authorities have been intensifying their efforts to cut excess capacity and pollution. Also to watch out of China next week are December figures for industrial output, retail sales and fixed asset investment.

Positive numbers from China could spur the Australian dollar higher to back above $0.79, after testing the level on Friday for the first time since September 2017. However, data out of Australia should also attract bets in the aussie/dollar pair as December employment figures are released on Thursday. Recent data out of Australia have been on the strong side, helping the aussie rebound sharply from its December 6-month low. Another strong jobs report next week could strengthen the currency’s upside momentum, putting the $0.80 handle within reach.

Japan reports producer prices and machinery orders

The yen soared against its major peers this week after a small reduction in long-dated government bond purchases by the Bank of Japan in a regular market operation on Tuesday prompted speculation that the BoJ may soon announce a scaling back of its stimulus program. Data out of Japan next week are unlikely to trigger similar moves but will nevertheless be watched to gauge the strength of the Japanese economy. Starting with corporate goods prices on Tuesday, Japan’s equivalent of producer prices is forecast to rise a solid 0.4% month-on-month in December, though the year-on-year rate is expected to ease from 3.5% to 3.2%. Machinery orders will follow on Wednesday. Core machinery orders – a good indication of business expenditure –  is forecast to decline by 1.4% m/m in November after a 5% jump in October.

Is UK inflation peaking?

Inflation (Tuesday) and retail sales (Friday) numbers will be the focus for pound traders next week as they could give clues as to whether the Bank of England is likely to raise interest rates this year. The 12-month CPI rate hit a near 6-year high of 3.1% in November. It is expected to edge down to 3.0% in December – perhaps a sign that the upside price pressures generated by sterling’s sharp devaluation following the Brexit referendum are starting to subside. Core inflation is also forecast to ease slightly, from 2.7% to 2.6% y/y. Retail sales meanwhile will likely take the shine away from the optimistic picture painted by the November industrial output figures which surged on the back of the weaker pound and rising global demand. Retail sales are forecast to drop 0.6% m/m in December after an unexpectedly strong November.

The Eurozone will also publish inflation figures. The final readings for December are expected to show CPI unrevised at 1.4%, but core CPI being revised lower from 1.1% to 0.9% y/y. A downward revision in the core rate could provide investors with an excuse to take profit on the euro’s impressive gains this week when it broke above the key $1.21 level for the first time since January 2015.

Few attractions out of the US

US releases will be scarce next week with Wednesday’s industrial production figures for the month of December, Thursday’s data on housing starts for the same month and Friday’s preliminary survey on January consumer sentiment by the University of Michigan expected to draw the most attention.

Industrial output is expected to exhibit positive growth for the fourth straight month, expanding by 0.5% m/m, a faster pace relative to November’s 0.2%. Manufacturing output figures – a subset of industrial output ones – will also be watched. Moving to housing starts, it would be interesting to see if they continue coming in solidly after reaching a more than a decade high in November. Lastly, the University of Michigan’s survey is expected to reflect an improvement in consumer sentiment, following the previous month’s decline. Other notable releases in the coming seven days are the Empire State Manufacturing index (Tuesday) and the Philly Fed Business index (Thursday).

Bank of Canada headed for third rate hike in six months

Canada’s economy continues to confound expectations with recent data on employment and retail sales suggesting the output gap is fast closing. This fuelled expectations that the Bank of Canada will raise rates for a third time since July when it meets on Wednesday. Futures markets are currently implying a more than 90% probability that the overnight rate target will rise from 1.0% to 1.25%. However, some analysts are warning that the BoC may decide to wait a little longer before hiking rates again so soon. Concerns about the possible termination of NAFTA and flat growth in monthly GDP in October may dissuade the BoC from taking early action.

A surprise no change in policy would be negative for the Canadian dollar, which rallied to a 3-month high of C$1.2354 to the US dollar in early January on the expectations of a rate rise this month, before retreating to around C$1.25 on renewed NAFTA worries.