The week ahead holds some key events: Japan's tankan survey, three central bank meetings and the U.S. jobs report for September. But despite the potential for surprises and shocks, don't be surprised that when everything is said and done, the dollar finishes next week not far from current levels.
Japan's Tankan Survey
The action starts off with the Japan's tankan survey of business sentiment. Data over the past week point to a further recovery in Japanese business confidence. That data included August
, which jumped more than in any month in 42 years, and an unexpected decline in Japanese unemployment to 4.7% from 4.9%, as well as a number of private surveys.
If the tankan survey comes in showing a modest rise as expected, it would be the third consecutive survey showing that a recovery in Japan is taking hold. Yet most market participants have come to appreciate this already. The fact that the whisper numbers are above the consensus estimates suggests it is going to take a much stronger report to elicit much of a market response. Let's not forget that all of the key measures are still expected to have negative signs precede them, which in diffusion indices means more respondents are negative than positive. So in effect, what the tankan report will really be saying is that, at best, there are fewer pessimists and that capital-spending cutbacks are slowing.
Some Japanese economic reports may be deceptive. Comparisons with year-ago activity may be exaggerated by the low base, i.e., the Japanese economy was contracting a year ago. Also, if you pump $1 trillion into a (roughly) $4 trillion economy, which Japanese officials have done over the past year or so, it is bound to produce some results, even if inefficiently used. The real question is whether the Japanese economy has entered a self-sustaining growth phase and thus far the answer from Japanese officials,
officials and many, if not most, market observers, is probably not. And the results of the tankan survey are unlikely to alter perceptions substantially.
Key Central Bank Meetings
After the tankan report, the market's attention will quickly shift toward the three key central bank policymaking meetings that take place between Tuesday and Thursday. The market sentiment has swung around and now has priced in little chance of a hike by the
Federal Open Market Committee
on Tuesday. The October fed funds futures contract was trading above 94.70 for the last seven to eight sessions. At 94.75, the market prices in with 100% confidence a stand-pat policy.
This will be followed by the
Bank of England's Monetary Policy Committee
, or MPC, which meets on Wednesday. It surprised the market in September by signaling a 25-basis-point hike in base rates. The factors that were cited to explain or justify the hike remain intact: There have been additional signs that the economic recovery is taking hold, and house prices, which were specifically cited by the MPC, have continued to rise. Nevertheless, the market expects the (hyper?) activist MPC to sit tight.
Previously, some observers had suggested that the strength of the pound in the aftermath of the rate hike would encourage the MPC to hold off future rate hikes. But in recent sessions, sterling has given back most of the gains scored on a trade-weighted basis, even though it is trading at its highest level vs. the dollar since the end of last year. On a medium-term view, sterling is likely headed back toward the $1.70 area, but is more vulnerable against the euro, after testing the 3.10 area against the German mark.
European Central Bank
meets on Thursday. Hawkish comments by several ECB officials have given rise to whispers of a near-term rate hike. The rise in energy prices -- compounded by the euro's persistent decline in the first half and continued growth in money supply beyond the official target -- underlie concerns that the new central bank may want to establish its credentials for pre-emptive action against inflation.
There is little doubt that the next move in euro-zone rates is higher, but the question, as is often the case, is one of timing. Part of those expectations for a near-term rate hike reflects post-hoc explanations offered by some observers for the euro's strength in recent sessions. It may also reflect a misunderstanding of the ECB. Top officials have been warning the market that a tightening bias is slowly creeping into the policy stance. They appear to be preparing the market for the eventual hike, but now does not seem to be the time, given the varied economic performance within the zone.
With each of the Big Three (Germany, France, and Italy) recording a different mix between inflation and growth, and the recent gains in the euro, the ECB is more likely to talk loudly and carry a little stick. The combination of the euro's recovery and the backing up of long-term rates means that the market has effectively snugged monetary conditions, mitigating some of the supposed pressure on the ECB.
U.S. Employment Data
Next week concludes with the U.S. jobs report for September. Median expectations call for a rise of around 225,000 in non-farm payrolls, which is very close to the average gain over the course of the past year. The data will provide a useful reminder to the worrywarts that the 1.6% annualized growth rate in the second quarter was an anomaly -- and not a precursor to a sustained slowdown in the U.S. economy.
Previously I suggested that third-quarter growth could be twice that of the second quarter. But after the recent batch of data, including the 0.9% jump in August
personal consumption expenditures
, my back-of-the-envelope calculations (nothing very sophisticated) warn that it could be as much as three times greater.
In the week ahead, look for the euro to hold below its third-quarter high near $1.0825, and for the dollar to remain confined to the broad trading range established over the past couple of weeks between 103 and 107 yen.
Marc Chandler is the chief currency strategist for Mellon Bank. At the time of publication, he held no positions in the currencies or instruments discussed in this column, although holdings can change at any time. While he cannot provide investment advice or recommendations, he invites you to comment on his column at