By DailyFX – Central Bank Meetings This Week and US Non-Farm Payrolls: What to Expect .We are expecting active and… … volatile trading in the first week of September.

There is a lot of market moving US economic data due out
this week in addition to four central bank rate decisions. Unfortunately
Ben Bernanke gave us little clues on what to expect from other central
banks since he was as convoluted as ever on Friday when he said that the
“Fed is ready to take additional actions as needed to provide
liquidity, while also warning that it is not the Feds
responsibility to protect lender and investors from the consequences of
their decisions. It took the combination of President Bush’s new
program to help struggling homeowners and Bernanke’s comments to
really drive the stock market higher. However, as usual, we look to the
bond and currency markets for a more accurate assessment of how the
financial markets felt about Fridays comments and we see that both
the Dow and carry trades failed to respond. This indicates that a rate
cut from the Fed is still not a done deal, but in the meantime, there
are many other things to worry about including the Bank of Canada,
Reserve Bank of Australia, European Central Bank and Bank of England
rate decisions. The RBA and BoE announcements should be nonevents since
both are expected to leave rates unchanged and do not release a
statement when they do so. The BoC and ECB rate decisions on the other
hand should be big market movers for the Canadian dollar and Euro
respectively. The BoC will need to decide whether they should hold onto
their hawkish bias while the ECB will have to decide between raising
rates and leaving them unchanged as well as their bias for the months
ahead. In the US, we will get our first chance to see how bad the labor
market may have deteriorated from the recent tightening of credit and
blowups in the financial sector. July job growth was tepid and even
though the market is currently looking for 109k jobs to be added to US
payrolls, the drop in jobless claims last week raises the risk for a
weak number. Even if payrolls are strong, the impact on the markets
could be limited since traders will speculate on whether this strength
can be sustained in September. This means a good number may not be good
enough for the US dollar. In addition to NFPs, the US will also be the
Feds Beige Book report along with service and manufacturing sector
PMI. On Thursday a number of Fed officials are also slated to speak so
watch out for any clarification on where the Fed stands and even if
policymakers refuse to provide more clarity, the non-farm payrolls
number should.

Euro: 3 Potential Outcomes of ECB Rate Decision

Next to the US non-farm payrolls report, the European Central Bank
interest rate announcement on Thursday is the most important and
potentially market moving event this week. Typically the ECB lets the
market know at least a month in advance what they plan on doing with
interest rates. This time however, Trichet and company will have
traders guessing up to the last second. There are three potential
outcomes of this much anticipated rate decision. The first and the most
unlikely is for the ECB to raise rates to 4.25 percent. This
surprisingly hawkish move would be extremely positive for the Euro,
taking the currency pair back above 1.3700. The second scenario is for
the ECB to leave rates at 4 percent, drop the words strong vigilance and
add some other dovish comments that would allude to interest rates
remaining unchanged for the remainder of the year. This would be
extremely bearish for the Euro, taking it back below 1.3550. The third
scenario would be for the ECB to leave interest rates unchanged and
either keep the words strong vigilance or other equally convoluted and
slightly hawkish comments, which would leave the door open for further
rate hikes and be only slightly bearish for the Euro.

British Pound: Strong Manufacturing Data Should Buy the BoE Time

The British pound is outperforming the Euro for the fourth trading day
thanks to stronger than expected UK manufacturing activity. The market
was looking for a decline, but the strongest level of output growth in
close to 13 years drove the index to a 3 year high of 56.3. Although
the overall report is hawkish, the drop in both output and input prices
will keep the Bank of England on hold this week. The lack of significant
inflation pressures should buy the central bank time, allowing them to
continue monitoring financial and credit market conditions before
deciding whether to press forward with another rate hike.

Carry Trades Could Face Further Resistance

The fact that carry trades did not respond to the rally in equities on
Friday and bond yields were basically unchanged tells us that risk
aversion in the market is still high and traders in different asset
classes are not necessarily buying into a Fed bailout. Although the
relationship between the Dow and carry trades broke down on Friday, the
fact that the Dows rally stopped short of significant technical
resistance (the 100 and 50-day SMA as well as the 61.8% Fibonacci
Retracement of 14021-12517) does suggest that carry trades could face
further pressure this week. This risk is compounded by the likelihood
of many central banks turning dovish and signaling that interest rates
could remain unchanged for the remainder of the year. The further
deterioration in Japanese labor cash earnings and capital spending has
had little impact on the Yen as the market is still focused on risk or
no risk.

Australian and Canadian Dollar Strengthen Ahead of Interest Rate
Decisions

The Australian and Canadian dollars have appreciated ahead of their
respective interest rate decisions. Their central banks will be the
first to announce where they stand on monetary policy. The Australians
have it easy since they dont say anything when they leave rates
unchanged. The Canadians on the other hand have to justify their
decision. There is a strong chance that the Bank of Canada will drop
their hawkish monetary bias given the global tightening of credit and
the potential impact of weaker US growth. GDP in the second quarter was
much stronger than expected, but that too is predicted to slow.
Meanwhile Australia will be releasing its Q2 GDP report tonight. On a
quarter to quarter basis, growth is expected to slow materially.

DailyFX Research Team
Forex Capital Markets LLC
32 Old Slip, 10th Floor
New York, NY 10004
Tel (212) 897-7660
Fax (212) 897-7669
E-mail: research@dailyfx.com

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