Week Ahead – Bank of Japan Meets, China Releases GDP
The Bank of Japan will be in the spotlight next week. This will likely reaffirm that rates won’t rise for a long time, leaving the yen at the mercy of foreign central bank moves and risk appetite. The People’s Bank of China will also meet and may ease policy to promote economic growth, although its actions are generally more important for stock markets than forex.
BoJ – A touch of optimism
The Japanese economy is turning a corner. A weaker yen has helped boost exports, businesses are gaining confidence according to the latest Tankan survey, the unemployment rate stands at just 2.2% and the country has finally escaped deflation.
This all sounds good, but the economy isn’t out of the woods yet. Consumption remains weak, wage growth is anemic despite a tight labor market and the Omicron wave sweeping the country is a major threat to the recovery.
The inflation rate speaks for itself. It is barely positive despite massive supply disruptions and soaring energy prices, so “organic” inflationary pressures remain subdued.
This means that while the central bank may adopt a slightly more bullish tone next week, any tightening moves are still a long way off. Recent media reports suggest the BoJ is debating when it can start telegraphing a possible rate hike, but that is unlikely to happen before next year.
As for the yen, the relative monetary policy suggests that the outlook remains negative, especially against currencies that will benefit from higher rates, such as the dollar or the pound sterling. That said, several factors could prevent strong losses of the yen.
The first is the huge spending program the new Prime Minister is about to launch to accelerate the recovery. Beyond that, as liquidity is withdrawn from the global financial system, episodes of market volatility could become more frequent, allowing the defensive yen to enjoy brief periods of strength.
The trend looks negative, but it could be a stormy ride.
China’s GDP in the spotlight
In China, the show will begin on Monday with GDP figures for the last quarter. Retail sales, industrial production and capital investment for December will also be released. All of these indicators are expected to ease, with annual GDP growth slowing to 3.6% from 4.9% previously.
This is not surprising given the crisis in the real estate sector and the energy shock during this quarter, not to mention the recent lockdowns in many cities as the government sticks to its zero covid policy.
But it could be ‘bad news is good news’ if GDP figures are weak, as this would give the People’s Bank of China the perfect excuse to ease policy again to counter the economic slowdown.
The PBoC’s liquidity measures generally have the most impact on the local stock market, but if traders feel this could stabilize the economy, it could also have an effect on China-sensitive currencies like the Australian dollar. .
Speaking of Australia, the national employment report for December will be released on Thursday. The Aussie has rallied significantly of late as iron ore prices have surged, but the outlook is still clouded.
Markets are pricing in four rate hikes by the Reserve Bank this year, which seems overly optimistic and leaves room for disappointment. The Australian economy is not this strong and could suffer the ripple effects from China, its largest trading partner by far.
UK data dump
There is also a heavy barrage of data releases from the UK. The ball will start on Tuesday with the jobs numbers for November, ahead of the December inflation numbers on Wednesday and retail sales on Friday.
The pound has had a very strong start to the year, fueled by heightened speculation that the Bank of England will raise interest rates again next month. The implied probability of a hike at this meeting currently stands at 78%.
The ability of the pound to stage such a powerful rally despite weak risk sentiment in the markets is quite impressive and suggests that monetary policy expectations are really what is driving the currency markets at the moment.
Markets are excited about Canada
Meanwhile, the Canadian economy is improving at such a dramatic pace that markets are now pricing in an 80% chance of a rate hike this month, contrary to the latest indications from the Bank of Canada that April is the earliest possible date. So, Tuesday’s upcoming inflation data and Friday’s retail sales could be crucial.
All in all, a rate hike this month seems like a bridge too far. While the labor market is booming and inflation is high, wage growth remains below pre-pandemic levels and Omicron is unleashed across the country, with many provinces imposing tougher restrictions lately. time. This could prevent the Bank of Canada from taking risks for the time being.
The loonie has rebounded strongly lately thanks to this speculation and the rebound in oil prices, and while the overall picture remains supportive, it could be disappointed by the central bank later this month.