Currencies Could Explode Next Week
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5 Reasons Why Currencies Could Explode Next Week
There are certain weeks in the foreign exchange market that are more exciting than others and the first week of each month is always a busy one. In fact the mini breakout in USD/JPY on Friday gives forex traders a taste of the larger moves they can expect in the major currency pairs in the coming week. There are no shortages of Tier 1 economic reports on the calendar but we also have central bank rate decisions and a major change in fiscal policy in Japan. There will be a lot of news for the market to absorb so directionality may be difficult to handicap but we know with confidence that all of these event risks will increase the volatility in currencies. At the beginning of this week, EUR/USD 1-month option volatilities were at their lowest level since 2007. USD/JPY also started the week with option volatilities at one year lows but all of that should change in the coming week for 5 reasons:
1. Japan Set to Raise the Sales Tax for First Time in 17 Years
2. ECB and RBA Central Bank Decisions
3. US, German and Canadian Employment Reports
4. Chinese PMIs
5. ISM and PMI Reports from US, EZ, Australia and Canada
First and foremost, Japan will be raising its sales tax for the first time since 1997 on April 1. The last time a politician dared to raise the consumption tax in Japan, he plunged the economy into recession. Hopefully it won’t happen again but such a monumental change in fiscal policy is sure to affect USD/JPY. Japan will also be releasing its quarterly Tankan report, which is one of those few pieces of Japanese data that can actually move the Yen. On the side of the dollar, we have non-farm payrolls, manufacturing and service sector ISM reports scheduled for release. An improvement in job growth is just what USD/JPY needs to break above 103 and at this stage of the recovery slower job growth would be jarring and poses a major downside risk for USD/JPY. Neither the European Central Bank or the Reserve Bank of Australia are expected to change monetary policy but the post meeting comments from Draghi and Stevens have the potential of triggering a big reaction in EUR and AUD. Chinese PMIs will also affect how the commodity currencies trade and the Canadian dollar in particular has a busy week with GDP, employment and the IVEY PMI report scheduled for release. So while the market’s appetite for U.S. dollars will play a big role currency movements next week, the abundance of market moving non-U.S. data means there could be more divergence than consistency in the forex market. In other words, relative growth will be most important
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