Trading Outlook: March 5 - 9, 2012

Five monetary policy meetings by major central banks and the U.S. Non-Farm Payrolls report will make for an interesting week ahead as traders examine the potential for more rate cuts by the European Central Bank and ponder QE3 odds.  

In preparation for the new trading week, here is the outlook for the Top 10 spotlight economic events that will move the markets around the globe. 

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

The U.S. services sector is forecast to register another month of growth, but at a slower pace, with an index reading of 56.2 in February from 56.8 in January.   

2.    AUD- Reserve Bank of Australia Interest Rate Announcement, Mon., Mar. 5, 10:30 pm, ET.

For the time being, the Australian central bank would be likely to keep rates unchanged at 4.25%, however, should the economy and the labor market weaken, the Reserve Bank of Australia would feel comfortable with another 25 or 50 bps reduction in the benchmark rate. The Australian dollar could begin to feel the pressure if the central bank gives a hint of an impending rate cut in the near future.    

3.    EUR- Euro-zone GDP- Gross Domestic Product, the main measure of economic activity and growth, Tues., Mar. 6, 5:00 am, ET.

The revised GDP estimate is expected to confirm that the Euro-zone economy contracted by 0.3% q/q in the fourth quarter of 2011. The ECB President’s warning about the potential for a “mild recession” could come true if there is another quarter of contraction in Q1 2012. If the Euro-zone economy fails to avoid a double dip, the market will begin to price more aggressively expectations for further rate cuts by the European Central Bank, which would weigh on the euro. 

4.    USD- U.S. ADP- Automatic Data Processing Employment, a measure of private sector job creation and labor market conditions, Wed., Mar. 7, 8:15 am, ET. 

After adding 170K jobs in January, job creation in the U.S. private sector is forecast to continue with up to 200K new jobs in February, in line with the recent trend of improvement in the labor market.

5.    NZD- Reserve Bank of New Zealand Interest Rate Announcement, Wed., Mar. 7, 3:00 pm, ET.

Even though the Reserve Bank of New Zealand is not expected to make any changes to its benchmark rate at this meeting, leaving it at 2.50% for another month, the New Zealand central bank is the most likely candidate of all other major central banks to produce a rate hike in the near future. The Kiwi dollar should remain well bid if the RBNZ reaffirms these expectations.

6.    CHF- Swiss CPI- Consumer Price Index, the main measure of inflation preferred by the Swiss National Bank, Thurs., Mar. 8, 3:15 am, ET.

Only a week ahead of the Swiss National Bank monetary policy meeting on March 15, the inflation report is expected to confirm that deflation continues to be a threat to the Swiss economy. The inflation gauge is forecast to spend another month in deflation territory at -0.9% y/y in February from -0.8% y/y in January. The Swiss National Bank had to resort to extraordinary measures to weaken its currency and as long as deflation and the strong franc continue to be a problem, the odds will remain high that the Swiss National Bank might soon be forced to take new bold measures to weaken the franc.

7.    GBP- Bank of England Interest Rate Announcement, Thurs., Mar. 8, 7:00 am, ET.

Maintaining the status quo would be the most likely outcome of the Bank of England's monetary policy meeting in March. After expanding the size of the Asset Purchase Program by extra 50 billion pounds, policy makers would not be in any hurry to do more quantitative easing in the near future. There will also be no need to make any changes to the already record low benchmark rate which will stay at the 0.5% level. With the recent QE expansion already priced in, as long as investor sentiment remains positive and the Bank of England does not venture away from the current course, the GBP could continue its efforts to target the $1.60 mark and possibly even the top of its multi-month range at $1.6165 against the greenback.

8.    EUR- European Central Bank Interest Rate Announcement, Thurs., Mar. 8, 7:45 am, ET.

Although the European Central Bank is not expected to make any changes to its existing monetary policy and will more than likely keep the benchmark rate at current 1.0% level at its March meeting, it would not be surprising to see ECB policy makers keeping the door open to further rate cuts in the near future in case economic conditions deteriorate. The euro optimism rally following the approval of the Greek bailout package has started to fizzle and the pressure on the single currency could accelerate if the market begins to price aggressively expectations for additional rate cuts and if investors once again start to doubt the EU leaders' ability to build a strong firewall to contain the debt crisis.

9.    CAD- Bank of Canada Interest Rate Announcement, Thurs., Mar. 8, 9:00 am, ET.   

The Bank of Canada will be yet another central bank to stay the course next week, maintaining its benchmark rate at the record low 1.00% level. However, it would be interesting to see if the Bank of Canada would take a more hawkish stance compared with other central banks who seem content with their accommodative monetary policies. Even the slightest hint of a shift towards tightening would continue to fuel the rally in the Canadian dollar. 

10.    USD- U.S. Non-Farm Payrolls and Employment Situation, one of the main indicators of U.S. economic health measuring job creation and unemployment, Fri., Mar. 9, 8:30 am, ET.  

Despite of the consensus forecasts which point to slower job creation in February with the U.S. economy expected to add up to 208K jobs from 243K in the previous month, considering the recent trend of consistent improvement in the weekly jobless claims, we should not exclude the possibility for another better-than-expected non-farm payrolls report. If that is the case, then not only could we witness better job creation, but we might even see another decline in the unemployment rate below the current 8.3% level. On the other hand, should such optimistic projections get disproved by the actual report, market sentiment could quickly begin to deteriorate and although risk aversion could set back in, the USD might fail to benefit from it, as a weak jobs report could increase the pressure on the greenback on raised QE3 odds ahead of the FOMC meeting on March 13.