Next Week » Central Banks, Inflation and Earnings Season
The Bank of Canada will be in the spotlight this week as it considers raising interest rates.
The yen took center stage in forex last week as the Bank of Japan surprised some market participants by leaving monetary policy unchanged. Meanwhile, Japan’s consumer price index rose to 4% year on year. Keep your eyes peeled for continued volatility in the JPY this week as the BoJ minutes and summary of opinions are released.
The Bank of Canada will be in the spotlight this week as it considers raising interest rates. An increase of 25 basis points is expected. In terms of corporate earnings, Microsoft (MSFT) and Tesla (TSLA) will be in the hot seat this week.
It will also be an important week for macro data, with additional data on inflation, manufacturing PMIs and fourth quarter US GDP. Last week’s data was generally weaker than expected. Will there be a sequel this week?
Bank of Japan
The aftermath of last week’s BOJ meeting is likely to continue into this week. The Bank of Japan left monetary policy and its control of the yield curve unchanged at its January meeting last week. This came after the December meeting, when the central bank increased the range around the 10-year JGB yield to 0.50%.
Many assumed that this was the beginning of the end of quantitative easing, but the governor of the Bank of Japan denied this. On Friday, Japan released its consumer price index for December at 4% year on year, the highest level since 1981. However, Kuroda refused to “give up” and said that monetary policy would remain accommodative.
This week, the Bank of Japan will publish the minutes of the January meeting on interest rates. Will they show that all members of the Committee are as accommodating as Kuroda? Or some think that the central bank should be involved in some form of QT.
In addition, this week the Bank of Japan will publish its opinion. According to the Bank of Japan, this describes the regulator’s view of the current state of affairs and the prospects for inflation and economic growth. Keep an eye out for the ongoing volatility of the yen pairs in forex this week.
Bank of Canada
The Bank of Canada is meeting on Wednesday this week to discuss monetary policy. The Bank of Canada has been a leader in changing interest rates, both up and near the plateau. The central bank is expected to raise rates by 25 basis points to bring the overnight rate down to 4.50%.
Consumer price data released last week for December showed that inflation is moving in the right direction, with the overall rate falling to 6.3% y/y from 6.8% y/y in November. However, as with the release of the US CPI last week, traders focused on the publication of the monthly report, which fell 0.6% from the previous value of 0.1%.
This is the largest monthly decline in this series since April 2020. However, employment data for December was strong.
Canada added 104,000 jobs in December against an expected 8,000 jobs. 84,500 of those jobs were full-time! Given declining inflation (though still relatively high) and a strong jobs report, will the Bank of Canada consider pausing rate hikes at its meeting this week?
Business Results
As Microsoft, Tesla, and Intel report results this week, big tech companies will start reporting quarterly this week. However, these are not the only companies reporting their results this week. Large companies such as 3M, General Electric, Johnson & Johnson and Boeing will also report. Other companies reporting results this week include: MMM, GE, MSFT, HAL, LMT, VZ, TXN, JNJ, T, BA, TSLA, AAL, ADM, V, MA, BX, INTC, MCD, AXP, CLC .
Economic data
There is a plethora of economic data coming out this week that could affect the markets. On Tuesday, the world will see January PMI data for the first time in manufacturing and services. Has activity slowed since the start of the year, or is the world looking for a possible soft landing in the coming months? In addition, consumer price indices for New Zealand and Australia will be released later this week. Do these plays mean that the RBNZ and RBA are waiting for another raise?
At the end of the week, the US will release an extended fourth-quarter GDP forecast and the Fed’s favorite inflation measure, core PCE. Underlying PCE is expected to fall to 4.4% y/y from 4.7% y/y in November. If the numbers turn out to be weaker than expected, will the FOMC consider pausing rate hikes at its Feb. 1 meeting? Other important economic data due this week include:
Sunday – January 22, 2023
Bank of Japan Monetary Policy Meeting Minutes
Monday – January 23, 2023
Canada: New Home Price Index (DEC)
EU: Consumer Confidence Data (JANUARY)
Tuesday – January 24, 2023
World: PMI in Flash & Services (JAN)
Germany: GfK Consumer Confidence Index (FEB)
UNITED KINGDOM: CBI Industrial Trends Orders (JANUARY)
Mexico: Mid-month CPI (JAN)
USA: Richmond Fed Manufacturing Index (JAN)
New Zealand: Consumer Price Index (Q4)
Australia: Consumer Price Index (Q4)
Australia: CPI (December)
Wednesday – January 25, 2023
United Kingdom: Producer Price Index (DEC)
Germany: Ifo business climate
Canada: Bank of Canada Interest Rate Decision
Crude oil reserves
Japan: Bank of Japan Opinion Summary
Thursday – January 26, 2023
United Kingdom: CPI Distribution Trades (JAN)
South Africa: Interest Rate Decision
USA: Orders for Durable Goods (DEC)
United States: Outstripping GDP Growth (Q4)
USA: PCE Extended Base Pricing (Q4)
USA: New Home Sales (DEC)
USA: Kansas Fed Manufacturing Index (JAN)
New Zealand: ANZ Business Confidence (JAN)
Friday – January 27, 2023
Australia: Producer Price Index (Q4)
USA: personal income (DEC)
US: Personal Expenses (DEC)
USA: Core Price Index PCE (DEC)
USA: Michigan Consumer Survey Finals (JANUARY)
USA: pending home sales (DEC)
View » Economic calendar
Chart of the Week » 5-Year US Bond Yield (Daily)
Source: Tradingview, Stone X
US 5-year bond yields are trading near key levels, which could decide the fate of the next move. Key yields declined from an October 21 high of 4.504% in an ordered channel to a short-term low of 3.385% on Thursday.
The 5-year bond yield peaked below the 200-day moving average at 3.446% but closed above it. Within the channel, the yield has formed a falling wedge. Yield is expected to reach the top of the wedge, pulling back 100% of the wedge. This will target 3.960%.
Wednesday’s candle also closed below the 50% retracement from the Aug 2, 2022 lows to the Oct 21, 2022 highs. However, the near-term movement stalled and it closed above the retracement level of nearly 3.563% on Friday.
This is also the upper trend line of the falling wedge. If the yield rises, resistance lies at the 50-day moving average around 3.783% and then at the upper trend line of the down channel around 3.857%.
However, if yields continue to decline, support lies at Thursday’s low of 3.385%, which is also the lower trend line of the wedge. The next support level lies at the 61.8% Fibonacci retracement level of the above time frame at 3.314%.
Perhaps the most important piece of chart information for currency traders is the correlation coefficient on the bottom bar of the chart. The current value is +0.84. A reading of +0.80 or higher is considered a strong positive correlation.
This means that when yields rise, the US dollar tends to move in the same direction (as long as the correlation is above +0.80). Thus, currency traders can use the movement of the 5-year yield as a potential indicator of the next direction of the US dollar in forex.
This week, the Bank of Canada will meet at the negotiating table to decide on interest rate policy. In addition, due to the events of the Bank of Japan, the volatility of currency pairs with the yen may persist. There will also be important economic and big business earnings data this week. Watch for volatility in all markets.
One more thing to mention that it’s Chinese New Year! Markets in China will be closed until January 30th. So watch out for additional volatility in tight markets in the Asian time zone.
Joe Perry, CMT, FOREX.com » Official site
Disclaimer: The information and opinions contained in this report are for general information only and do not constitute an offer or solicitation to buy or sell any currency contracts or CFDs. Although the information contained herein has been obtained from sources believed to be reliable, the author does not guarantee its accuracy or completeness and accepts no liability for any direct, indirect or consequential damages that may result from anyone relying to such information.