[ForexNews]

Before we catalogue the hard data to watch in the week ahead, we will quickly reflect on two key data releases last Friday. US GDP for Q2 showed a decline of only 1%qoq, indicating that the worst of the recession is behind us. The data was accompanied by benchmark revisions which showed a steeper decline in activity in 2008. As foreshadowed in the US weekly analyst on Friday, we see upside risks to outlook for the second half of this year, however 2010 still faces notable headwinds. From a rates perspective, analysts still view the removal of policy accommodation by the Fed as a long way off, predicated on the view that the US unemployment rate is set to continue to climb through 2010. At the long end of the curve, USTs are expected to remain range bound between 3.25%-3.7%. Market expects a meaningful decline in core inflation on the back of sluggish US activity.

Swedish Q2 GDP was stronger than expected being flat on the quarter vs a consensus expectation of a -0.4%qoq decline. Swedish economy is expected to grow relatively firmly in H2 generated by the rapid and persistent improvement in financial conditions in recent months. The latest NIER business tendency survey showed an improvement in conditions and pointed to positive growth in H2. The Swedish.

Turning to this week: The Korean trade data, released over the weekend, showed a 20.1% yoy decline in exports. However as this large decline reflects base effects from last year we would not read too much into the drop. Importantly the sequential momentum in the export data remains firm, signalling that exports are recovering from their trough around the turn of the year.

We have to wait for the end of the week for a key piece of hard data – namely the next instalment of payrolls and unemployment. Analysts expect payrolls to show a decline of only - 300k, a slightly better than consensus forecast. On recent payrolls days, the market has reacted strongly to surprises in the payrolls data and tended to ignore the unemployment figure. While payrolls may end up being the important barometer for risk sentiment, the unemployment rate is important for the rates market. The unemployment is expected to rise from 9.5% to 9.7%. On its past reaction function, the Fed is only likely to consider hiking
rates when it is confident that unemployment has started to fall.

[ForexNews]

Several central banks are set to make pronouncements on policy in the week ahead. Starting in Asia, Tuesday brings the next RBA decision. With unchanged rates widely expected all eyes will be on the RBA’s rhetoric and any attempt to move away from the explicit easing bias which has been included in all the statements since the bank last cut rates in April. Governor Stevens’ speech last week could be interpreted as a first step away from that easing bias given his upbeat outlook on the Australian economy, however his cautious tone on the broader global outlook gave a nod to the bank’s easing bias. Some continue to think a further rate cut is unlikely, and expect the RBA to be one of the first
bank’s to start tightening rates with a 50bps hike next March. More broadly the RBA is likely to be approaching the transition phase towards moving away from the very accommodative policy stance in place at present, which may provide something of a template for other central banks further down the line.

The other key policy meeting in Asia is that of Bank Indonesia. The bank has signalled that another rate cut is possible given the fall in inflation; however the decision is likely to be a close call. The meeting will provide the bank a further opportunity to comment on a stronger exchange rate. The market is slowly starting to listen to the bank’s commentary and IDR has traded comfortably below 10,000.

Turning to Europe, the Bank of England’s meeting is set to garner the most attention. There are several reasons for and against the BoE expanding its QE purchase program. On weighing these arguments up the BoE will expand its asset purchase programme by GBP25bn, to utilise the entire amount. However the decision to take this step is likely to be a close run thing. If the bank decides
against this measure, we would fade any knee jerk reaction in rates largely because we don’t expect any tightening until Q1 of next year.

By comparison, the ECB meeting also on Thursday is unlikely to generate anything new.