Week's Top 10 Forex Events Outlook: October 22-26, 2012

The FOMC monetary policy meeting and the U.S. Q3 GDP estimate will headline the busy schedule in the week ahead as traders await the next move by the Fed and continue to gauge the condition of the world’s largest economy.

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. JPY- Japan Trade Balance of the difference between imports and exports, Sun., Oct. 21, 7:50 pm, ET.

Exporters in Japan are expected to continue to feel the negative impact of the strong yen with the trade deficit forecast to widen by -740 billion yen in September compared with -470 billion in August. The alarming trend of rising trade deficit could prompt the Bank of Japan to offer additional easing at the upcoming meeting on October 30. Such expectations should keep any yen gains capped in the days leading to the Bank of Japan’s monetary policy announcement.

2. CAD- Bank of Canada Interest Rate Announcement, Tues., Oct. 23, 9:00 am, ET.

In recent weeks, statements by the Bank of Canada’s Governor and the Canadian Finance Minister have made it clear that they are in no hurry to start raising rates despite of the market’s expectations that the Canadian central bank is one step closer to a rate hike. This is why it would not be surprising to see the Bank of Canada maintaining the status quo in October and leaving the benchmark rate at the 1.0% level. However, compared with the rest of the major central banks, the Bank of Canada will remain as the most likely candidate to tighten monetary policy in 2013.

3. EUR- Eurozone Composite PMI and Germany IFO Business Climate Index, a leading indicator of economic conditions measuring the outlook of businesses, Wed., Oct. 24, 4:00 am, ET.

A slight improvement to 46.5 in October from 46.1 in September is forecast for the Composite PMI in the Euro-zone, but not enough to lift the index above the 50 boom/bust line. With the index spending another month in contraction territory, the report should serve as a reminder that activity in the euro-area remains subdued. The PMI data could be combined with a weak German business climate and expectations index which is forecast to stay near recent lows at 101.6 in October compared with 101.4 in the previous month.

4. USD- U.S. New Home Sales, an important gauge of housing market conditions measuring sales of new homes, Wed., Oct. 24, 10:00 am, ET.

Following a small pullback in existing home sales but better than expected housing starts, sales of new homes in the U.S. are forecast to register an increase to 386K in September from 373K in August.

5. USD- U.S. FOMC- Federal Open Markets Committee Interest Rate Announcement, Wed., Oct. 24, 2:15 pm, ET.

With the Fed already committed to an open-ended QE, there will be no need for a change of its existing monetary policy at the October meeting. The only changes in the near future will likely be adjustments in the amount of asset purchases- more QE if economic conditions deteriorate, and vice versa. But with the recent U.S. labor market and other data showing some optimistic signs, and the presidential election around the corner, the Fed will be in no hurry to rush into any such adjustments.

There may be an extension of Operation Twist which is set to end on December 31, 2012, although it may be too early for such announcement in October. The Fed will probably confirm its commitment to keep rates low until 2015 and to do more QE if necessary, but the meeting will not be likely to deliver anything that we didn't already know. If the Fed refrains from more easing, the USD might be able to attract bids in the aftermath of the announcement.

6. NZD- Reserve Bank of New Zealand Interest Rate Announcement, Wed., Oct. 24, 4:00 pm, ET.

As other major central banks remain in an easing mode, the Reserve Bank of New Zealand will continue to stay the course and is expected to keep the benchmark interest rate at the 2.50% level. Governor Alan Bollard would probably express concerns about the global slowdown and the persistent strength of the New Zealand dollar, but the impact on the currency from such a statement would likely be limited, especially if risk-on sentiment continues to keep the Kiwi dollar supported.

7. GBP- U.K. GDP- Gross Domestic Product, the main measure of economic activity and growth, Thurs., Oct. 25, 4:30 am, ET.

After three consecutive quarters of contraction, the U.K. economy is forecast to finally return to growth by 0.6% q/q in the third quarter of 2012, compared with the 0.4% q/q drop in Q2. An upbeat GDP report could boost the GBP on expectations that an economic recovery in the U.K. would reduce the odds of additional QE by the Bank of England.

8. USD- U.S. Pending Home Sales, a leading indicator of housing market activity measuring pending home sale contracts, Thurs., Oct. 25, 10:00 am, ET.

In line with the recent optimistic housing market data, the pending home sales index is forecast to rise by 1.8% m/m in September, following the 2.6% m/m drop in August.

9. JPY- Japan CPI- Consumer Price Index, the main measure of inflation preferred by the Bank of Japan, Thurs., Oct. 25, 7:30 pm, ET.

Far from the Bank of Japan’s 1.0% inflation target, the Japanese national core inflation gauge is forecast to remain in deflation territory with a reading of -0.2% y/y in September compared with -0.3% y/y in August. As deflation continues to be an issue and with the economy slowing, the Bank of Japan could feel the urge to consider additional easing on October 30 as a tool to curb the persistent strength of the Japanese yen and to spur export growth.

10. USD- U.S. GDP- Gross Domestic Product, the main measure of economic activity and growth in the world’s largest economy, Fri., Oct. 26, 8:30 am, ET.

In the second quarter, the U.S. economy grew by an anemic 1.3% q/a, but forecasts point to a bit stronger 1.8% q/a expansion in the third quarter of 2012. Should the number of this preliminary estimate be revised higher in upcoming months while in the final quarter of the year the U.S. economy shows resilience in the face of a global slowdown, the USD could benefit from future upbeat U.S. economic data which could prompt the Fed to reduce the size of its asset purchases and to shorten its open-ended QE timeframe.