FX: The Week Ahead

The United States will be front and centr this week, with Chairman Bernanke’s speech this Friday. Given that most commentators are betting on some form of additional stimulus, we believe that any measures that may be announced are more likely to disappoint markets than satisfy them. With the U.S. equity market at practically its highest level of the year, the Chairman of the Federal Reserve needs to introduce a measure that meets market expectations or indicates that he is about to introduce such a measure (i.e. quantitative easing). Otherwise, we can expect massive sales of risky assets. The effect on the loonie may be considerable, given the low-trading volumes observed lately. See our section on the loonie for a fuller discussion of quantitative easing and its impact on our currency.

Canada
There are only two economic indicators for Canada this week, but both are important. On Thursday, the Current Account will be released for the second quarter of 2012. Without question, Friday will be the most important day for Canadian news when GDP data for June is released. The market is expecting 1.6%, down from a reading of 1.9% last quarter. Because several recently released indicators suggest a slight slowdown in economic growth, any figure that falls below analysts’ expectations will necessarily raise doubts about Governor Carney’s willingness to change the Bank of Canada’s current expansionary monetary policy. However, this news may have only a limited impact, given that it will be released on the same day as Chairman Bernanke’s speech.

United States
This week’s busy economic and political agenda in the U.S. should serve as a barometer for risky assets. It all begins tomorrow, with the release of the Consumer Confidence Index. Then GDP data will be released on Wednesday. Economists are expecting GDP to be up 1.7%, or 1% more than the last reading. Wednesday will see the release of Federal Reserve’s Beige Book. On Thursday, Personal Income data will be known, and on Friday, we can expect the University of Michigan’s Consumer Sentiment Index, followed by Chairman Bernanke’s long-awaited speech in Jackson Hole, Wyoming.

International
International news may well receive less attention this week, given the fact that market participants will be positioning themselves with respect to Chairman Bernanke’s speech at Jackson Hole. On Tuesday, the GfK German Consumer Climate Index will be announced, followed by Germany’s Consumer Price Index for August. Then on Thursday Germany will release employment figures for August. Also on Thursday, we can expect the latest results from the euro zone’s Business and Consumer Survey. The week will end with German Retail Sales, followed by the euro zone’s Unemployment Rate. Have a good week!

The Loonie
"Better mad with the rest of the world than wise alone." Baltasar Gracian

Each year since 1978, the Federal Reserve Bank of Kansas City has held a symposium on the economic outlook in the U.S. The event is a place where central bankers and private-sector and academic economists meet and discuss economic issues. Since the 2008 financial crisis, the Jackson Hole meeting has also become a relatively good window into the Fed’s intentions and the measures it will try to take to support the U.S. economy. It was at Jackson Hole in 2008 that we learned that the Fed would undertake a large bond purchasing program to bring down interest rates, with the hope of bringing an end to the economic downturn triggered by the financial crisis. This initial quantitative easing program (QE1) began in November 2008, with the Fed planning to buy some U.S.$600 billion worth of bonds. While this was already an astronomical amount, it was just the beginning of the Fed’s efforts to get the U.S. economy back on track. By the time the QE1 program had ended in March 2010, the Fed had bought $1,250 billion worth of bonds, most of which were mortgage-backed bonds. This was followed by a second wave of monetary easing (QE2) at the end of 2010 that was also hinted at Jackson Hole meeting. QE2 was focused on the purchase of bonds with longer terms --from 2 to 10 years -- issued by the U.S. Treasury Department. Once again, the official objective was to reduce interest rates to support economic growth.

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