US Dollar, New Zealand Dollar to Face Fed, RBNZ Rate Decisions This Week

The US dollar and New Zealand dollar are the two major currencies to face the highest event risk this week, as both the Federal Reserve and the Reserve Bank of New Zealand will announce rate decisions. Adding to the mix, US consumer confidence, Q1 GDP, and ISM manufacturing all have the potential to shake up risk trends.

• US Consumer Confidence (APR) – April 28
The Conference Board’s consumer confidence index for the month of April is forecasted to continue creeping higher from its record low of 25.3 reached in February up to 29.9. With record keeping having begun in 1967, the steady plunge in sentiment from the 2007 highs of 111.90 makes the extent of the recession especially clear. Nevertheless, a surprisingly strong result could provide a boost to risky assets, as the move would indicate that sentiment may have bottomed out. However, if consumer confidence goes little changed or rises right in line with expectations, the news is unlikely to evoke any reaction from the markets.

• US Gross Domestic Product (1Q A) – April 29
The 08:30 ET advanced reading of Q1 GDP for the US is forecasted to contract for the third straight quarter at a rate of -4.7 percent, following the Q4 contraction of 6.3 percent. The National Bureau of Economic Research (NBER) has already declared that the US has been in recession since December 2007, but a plunge in GDP that is sharper than expectations will only suggest that the contraction in growth will continue to worsen. The Federal Reserve really has no room to make monetary policy more accommodative, so traders should watch for the impact of this report on equities, as a surge in risk aversion may only lead the US dollar higher despite the disappointing fundamental scenario.

• Federal Open Market Committee Rate Decision – April 29
The Federal Open Market Committee (FOMC) is widely expected to leave the fed funds target range at 0.0 percent - 0.25 percent, and this should remain the case throughout much of the year. In fact, the FOMC starting saying in January that they continue “to anticipate that economic conditions are likely to warrant exceptionally low levels of the federal funds rate for some time, ” and they Committee said something similar in March. Furthermore, the last statement highlighted that the Committee's policy focus is to support the functioning of financial markets via measures that are likely to keep the size of the Federal Reserve's balance sheet at a high level. As long as we see these sorts of statements continue to be published, the news shouldn’t be too market-moving. However, the statement could have an impact on risk trends if the FOMC announces an expansion of their quantitative easing efforts, and utimately, any news that is positive for the stock markets may be negative for the greenback (which has been trading solely as a safe-haven asset lately), and vice versa.

• Reserve Bank of New Zealand Rate Decision – April 29
According to a Bloomberg News poll of economists, the Reserve Bank of New Zealand (RBNZ) is forecasted to cut rates by 50 basis points to 2.50 percent. Meanwhile, Credit Suisse overnight index swaps are pricing in at least a 25 basis point cut, but are also pricing in a 48 percent chance of a 50 basis point reduction. Based on the RBNZ’s policy statement from March, the central bank is still open to making monetary policy more accommodative, but they will not seek to implement the same aggressive cuts they’ve applied in the past as they said that they said “future cuts will be much smaller than observed recently.” With growth still slowing, the financial markets not yet stable, and inflation pressures receding, the odds are in favor of a 25 or 50 basis point cut at 17:00 ET on Wednesday. That said, the outlook for the New Zealand dollar will hinge upon their policy statement, as indications that they are open to further cuts could weigh on the currency. However, if the RBNZ suggests in their policy statement that they will leave monetary policy unchanged going forward, the New Zealand dollar could actually rally.

• US ISM Manufacturing (APR) – May 1
Unlike the releases of personal income and personal spending on April 30, the 10:00 ET release of the ISM Manufacturing index will give a more timely view of conditions in the economy. The April reading of the index is anticipated to rise to 38.5 from 36.3, and while this would mark a slight improvement, the index would ultimately still be close the nearly 29-year low of 32.9 reached in December. This would also mark the fifteenth straight month of contraction in business activity, suggesting that the recession remains in full force. Weaker than expected results could lead flight-to-safety to push the US dollar higher, while surprisingly strong numbers could weigh the currency down.

See the DailyFX Calendar for a full list, timetable, and consensus forecasts for upcoming economic indicators.
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