1. Janet Yellen Testimony
One of the first decisions that Janet Yellen needs to make
as Federal Reserve Chairman is what to do with their unemployment rate
threshold. Will they lower it or drop it completely? On Friday we saw the U.S.
jobless rate dropped to 6.6%, only 0.1% above the central bank’s threshold but non-farm
payroll growth was muted for the second month in a row. Tuesday’s testimony
will be our first opportunity to get Yellen’s interpretation of the data. She
is scheduled to testify before the House on Tuesday and Senate on Thursday. Her
prepared remarks will be released at 8:30am ET on Tuesday, 90 minutes before
she delivers her first public speech on the economy as Chairman of the Federal
Reserve. There is no doubt that she will be asked about what the Fed plans to
do with their 6.5% unemployment rate threshold and most likely she will say
that they will reevaluate forward guidance in March. Yet it may be difficult
for her to dance around all of the questions from Congress without revealing
some of her plans for monetary policy.
2. Bank of England Inflation Report
Like the Federal Reserve, Bank of England policymakers also
have their backs against the wall because the unemployment rate is falling
faster than they anticipated. The BoE tied itself to an unemployment rate
threshold and they are now only 0.1% away from that level. Aside from providing
their latest economic forecasts, the Monetary Policy Committee will often
telegraph major changes in policy in their Quarterly Inflation Report. At bare
minimum, the BoE will need to update their forward guidance and could choose to
abandon their unemployment rate threshold or lower it. Abandoning the threshold
would create less volatility for their financial markets and currency than a
change in the level of the threshold but both scenarios would most likely be
negative for sterling.
3. Chinese Trade Balance
The Chinese economy is slowing and this week’s trade balance
will tell us just how much export growth slowed in at the beginning of the
year. Exports are expected to have grown by only 1% in January, down from 4.3%
at the end of last year. If exports decline and the trade surplus contracts
concerns about slower Chinese growth could drag equities and currencies lower.
The Australian and New Zealand dollars should suffer the most as investors
wonder whether it was wise for the Reserve Bank of Australia to drop its easing
bias. At the start of the year we saw how concerns about U.S. and Chinese
growth weighed on the markets and this is a reason why risk is vulnerable this
week.
Aside from Janet Yellen’s testimony, the Bank of England
Inflation report and Chinese trade numbers, Australian employment, U.S. retail
sales and the Eurozone’s fourth quarter GDP numbers can also have a big impact
on how currencies trade this week.