The FX Week Ahead

Four monetary policy meetings by major central banks and the U.S. Nonfarm Payrolls and Employment Situation report will kick-start the first trading week of the fourth quarter as traders await the next move by the European Central Bank and continue to gauge U.S. labor market conditions.

Top Ten Events For The Week Ahead

1. JPY- Japan Tankan Index, a Bank of Japan quarterly survey of large and small businesses considered as the main indicator of economic conditions in Japan, Sun., Sep. 30, 7:50 pm, ET.

The consensus forecasts point to mixed results from the Tankan survey but with an overall negative bias as the manufacturing index registers a larger contraction at -4 in Q3 2012 compared with a reading of -1 in the second quarter, while the non-manufacturing index pulls back to a reading of 7 in Q3 from 8 in the previous quarter. The report should serve as a reminder that the Japanese economy is slowing, raising the odds of additional easing at the upcoming Bank of Japan meetings on October 5 and October 30.

2. USD- U.S. ISM Manufacturing Index, a leading indicator of economic conditions measuring activity in the manufacturing sector, Mon., Oct. 1, 10:00 am, ET.

Following the drop in contraction territory to 49.6 in August, the U.S. manufacturing index is forecast to climb above the 50 boom/bust line with a reading of 51.0 in September.

3. AUD- Reserve Bank of Australia Interest Rate Announcement, Tues., Oct. 2, 12:30 am, ET.

With the Australian economy starting to feel the impact as its biggest trading partner China heads for a “hard landing”, the Reserve Bank of Australia might consider the need to ease policy with a 25 bps rate cut which will reduce the benchmark interest rate to 3.25% from the current 3.50% level. Pressures on the Australian dollar could mount if the central bank cuts rates or hints an impending one in the near future.

4. USD- U.S. ADP Employment Report, a measure of job creation in the private sector of the U.S. economy, Wed., Oct. 3, 8:15 am, ET.

Job creation in the U.S. private sector is forecast to slow with up to 150K jobs added in September from 201K jobs in August, sending a warning signal ahead of Friday’s Non-Farm Payrolls data.

5. USD- U.S. ISM Non-Manufacturing Index, a leading indicator of economic conditions measuring activity in the services sector, Wed., Oct. 3, 10:00 am, ET.

The U.S. services sector is forecast to register another month of growth, although at a slower pace, with a non-manufacturing index reading of 53.4 in September compared with 53.7 in the previous month.

6. GBP- Bank of England Interest Rate Announcement, Thurs., Oct. 4, 7:00 am, ET.

After deciding to wait and see the moves of other central banks in September, the Bank of England should be ready to pull the trigger on more easing. The bank will keep its benchmark interest rate unchanged at 0.50%, but it would not be shocking to see an additional expansion of the Asset Purchase Program by 50 billion pounds. In addition, we should not exclude the possibility that the Bank of England could be forced to consider a rate cut to supplement its QE efforts if the EU debt crisis escalates, or due to further local and global economic slowdown. The pressure on the GBP will intensify if the market begins to price such expectations.

7. EUR- European Central Bank Interest Rate Announcement, Thurs., Oct. 4, 7:45 am, ET.

With the OMT bond buying program plan already in place, the European Central Bank has put the ball in the politicians’ court and can afford to sit on the sidelines in October. This, of course, does not mean that there will be no more easing in upcoming months as the threat of recession looms over the Euro-zone economy and the EU debt crisis is still far from over. It would not be surprising to see the European Central Bank producing another 25 bps cut in the final quarter of the year. Whether the ECB expands its already inflated balance sheet to buy bonds or announces an additional reduction in the benchmark rate, the euro should feel the pressure, especially if a rate cut makes it an even stronger contender for the title of preferred carry trade currency.

8. JPY- Bank of Japan Interest Rate Announcement, Fri., Oct. 5, around 12:00 am, ET.

Ten trillion yen of additional quantitative easing was not enough to weaken the yen in September and the Bank of Japan watched its currency rally in the aftermath of the monetary policy announcement. With the persistent strength of the yen still intact and the economy slowing, the Japanese central bank is faced once again with the tough task of finding new creative ways to weaken the yen and to add more impetus to a recovery that is losing momentum. Although the Bank of Japan might sit on the sidelines and wait until its second meeting on October 30 before it announces another QE expansion, the yen gains would probably remain capped in the days leading to the bank’s monetary policy decision.

9. EUR- Euro-zone GDP- Gross Domestic Product, the main measure of economic activity and growth, Fri., Oct. 5, 5:00 am, ET.

The final reading of the Q2 GDP will confirm the preliminary estimates that the Euro-zone economy contracted by 0.2% q/q in the second quarter of 2012. Many forecasts point to a double dip recession with another consecutive quarter of contraction in Q3 and the euro could feel the pressure as the market prices in more easing by the European Central Bank in upcoming months.

10. USD- U.S. Non-Farm Payrolls and Employment Situation, the main indicator of U.S. economic health measuring job creation and unemployment, Fri., Oct. 5, 8:30 am, ET.

Now that we know that the Fed and the European Central Bank are willing to commit to open-ended quantitative easing, things will get back down to economic conditions around the globe when trying to discover the appropriate levels for the USD exchange rate against other currencies. The greenback could benefit if the U.S. economy demonstrates resilience in the face of a global slowdown. We could witness a month of better job creation with the U.S. economy expected to add up to 110K jobs in September, compared with 96K in August, while the unemployment rate inches higher to 8.2% in September from 8.1% in the previous month.