US jobs, ECB, Yellen and China may all combine to bring volitile currency trading. Local data today will start a week of major releases

By Raiko Shareef

The less that is said about Friday’s trading, the better. Most of the US market looked to have made the sensible decision of bridging Thursday’s Thanksgiving holiday and the weekend.

With thin liquidity, there’s little to gain trying to make rhyme or reason of broader market moves. Overall, the USD closed higher, with slight more pain felt by commodity-linked currencies. The latter likely took their cues from fresh weakness in oil prices.

After last week’s doldrums, this week’s agenda will come as a shock to the system. There are an excessive number of top-tier data releases and policy events due. We cover some of the highlights below.

Front of mind will be the ECB’s policy decision (Thursday Frankfurt time), where the market is expecting expansion and/or extension of the current bond-buying program (currently €60 bln per month until Sep-16), coupled with a small cut to the deposit rate (currently -0.2%). There is a great deal of wariness that EUR/USD already has priced this in completely, thus leaving the market vulnerable to a nasty short squeeze. On the other hand, ECB President Draghi has bested high market expectations before, such as when the ECB introduced its QE programme in January. That has kept a lid on EUR rallies so far, but we’d still be guarding against disappointment with a tight stop on any short EUR trades.

Of course, the US employment reports (Friday US time) will garner interest, but only a disastrous result would likely derail the FOMC from raising rates next month. It is FOMC Chair Yellen’s two appearances this week (Thursday and Friday US time) that are a bigger draw for us. In truth, though, Yellen has become very adept at keeping all options on the table, and we doubt too much will be revealed ahead of 17 December.

The Chinese renminbi is likely to be granted entry into the IMF’s SDR bucket tonight, and the focus will be on what weight it is assigned. Any divergence from the 10% expectation may have a modest impact on EUR, JPY and GBP, whose weightings will be shrunk to accommodate CNY.

Other highlights will include the local ANZ business survey (today), the US ISM (Tuesday), China’s PMIs (Tuesday), Australia’s GDP report (Wednesday), and the OPEC meeting (Friday).

Where to, then, for NZD? With the prospect for volatility abound, and 0.66 proving resilient, we look for another foray below 0.65, and possibly a break of 0.64, under the right conditions (i.e. data outcomes). However, the ECB remains a real wildcard, if markets decide that a larger-than-expected programme is risk-asset supportive.


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Daily exchange rates

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Raiko Shareef is on the BNZ Research team. All its research is available here.